How to Build Your Emergency Fund
The financially prudent will tell you that having an emergency fund is the best buffer against unexpected expenses. In an economic climate marked by conflicts, a cost of living crisis, and global health concerns, being cash-strapped is the last thing on anyone’s wishlist.
An unexpected household expense, medical tests/bills, maintenance costs, tech updates, and natural disasters are a few possible scenarios. How does one navigate these expenses without punching a hole through your pocket or negatively impacting your credit score?
That’s when an emergency fund can come to the rescue, taking on the major brunt of these unforeseen expenses.
When it comes to building an emergency fund, you are typically looking to save approximately anywhere between 3-6 months worth of your monthly expenses. Preferably, in an easy, quickly accessible savings account like an Instant Access Savings account or an Individual Savings Account (ISA).
But the question is, how do you build an emergency fund? Well, that’s exactly what we’re here to discuss.
In this article, we’ll explore 5 tips to build an emergency fund so you don’t find yourself struggling during difficult times.
So let’s get started.
1. Set an achievable goal.
Let’s say you’re setting aside some savings for an emergency fund and need about £6,000 over 12 months. That breaks down to approximately £500 per month. The best way to start saving up for this would be to review your budget and cut spending on non-essential goods & services. This would allow you to budget better & see where money can be freed up.
The key is to set realistic, achievable goals. Goal setting shouldn’t become a cause of stress. The whole idea of setting a goal is to simplify the process for you.
2. Automate your savings!
There are many benefits to automating your savings. It can help you set aside a particular amount consistently, even if you forget! This will build up your savings nest or emergency fund much more quickly. Many people have found it helpful to use auto-saving tools like Emma, Plum, Snoop, Starling Bank & Chip among others, to stash aside some portion of their income.
You could also consider starting a recurring savings account and doing a savings challenge. For example- 30 for 30 where you set aside £30 each week for 30 weeks. This is an easy exercise to cultivate financial discipline.
3. Options for when you haven’t saved enough
If you haven’t been able to save enough for your emergency fund despite your best budgeting efforts, fear not. When dealing with unforeseen expenses in the absence of an emergency fund, cash loans are your best bet. They usually come with high interest rates, but they generally don’t need collateral.
However, your credit score may play a role in determining interest rates, and it may vary from lender to lender. Fortunately, you can apply quickly to an online lender these days and receive your cash loan the same day, making it a boon for tackling those urgent situations.
4. Where to save your Emergency fund money
Cash is king, but cash isn’t safe. You can entrust large waddles of cash to a friend or even a family member, but it may not always be the wisest option. Cash ISAs come highly recommended as they earn you tax-free interest. Money market funds are also a good option. While they may not help you grow your savings, they are a good place to hold.
High-yield savings accounts, stock markets, and bonds are other noteworthy options. The key thing to remember is that your emergency fund should be an easily accessible liquid cash option.
5. Pace yourself
Small, consistent steps will yield better long-term results. That’s why setting smaller goals may be a good way to begin.
Say, for example, you initially set a goal of pooling 6 months’ worth of savings into your emergency fund. If you find yourself struggling or are overwhelmed by it, it’d be a good idea to split it into doable weekly goals or lower your savings goal from 6 months to 3 months. Once you achieve your goal, you can reset it to a new goal!
All good things take time, patience and discipline, and emergency funds are no different. Although building them up isn’t going to happen overnight, make sure you don’t get hung up on perfectionism when you aren’t able to meet your goal. What matters is that you try. When you do reach your goals, commend yourself for it and celebrate the little wins.
Conclusion
Saving up for an emergency fund is simply buffering yourself & your household against life’s uncertainties. It’s like a security blanket to rely on when your cash sources dry up.
Remember that starting small is better than not starting at all. It’s a long-term goal that’s not set in stone and requires you to be open-minded & flexible.
You can afford to take your time and work your way up gradually. Reviewing your financial must-dos, tracking your progress and readjusting your pace are all steps that will serve you well. As long as you’re consistent, every small step counts.