Do you have an emergency fund? If you have some savings already set aside to cover you in case you suddenly lose your job or have a large, unexpected expense, this is your emergency fund. Usually, it’s recommended that this fund can cover your rent or mortgage, utility bills and grocery costs for at least 6 months.
Why do you need one?
Financial emergencies can present themselves at any given time. While job loss is one of the more obvious situations where an emergency fund is useful, there are plenty of others. For example:
- You may suddenly have a major health-related expense
- Your pet might need an expensive surgery
- Your car might need a significant repair job
- You may find out your home needs some significant repair-work
- You might have to travel abroad for a family emergency and buy a plane ticket at short notice.
Determining your goal
If you don’t have an emergency fund, there’s never a bad time to start one. And if you do, it’s always wise to keep building it.
When calculating your goal, consider how large your family is and what the monthly outgoings are for essentials. Once you’ve established this figure, multiply it by 6 to see how much you would need to keep you afloat for 6 months. Compare it against the amount you currently have in your emergency savings, and this indicates how much you strictly need to save.
To make it easier to find out how much goes towards different areas of your lifestyle, many mobile banking apps now give you detailed breakdowns. If yours doesn’t offer this, find a reliable budgeting app that will.
Strategies for building your goal
Once you’re getting a feel for how much you need to save, you may be looking for ways to make it more practical. Finding an online tool that helps you set up goals, for example by saving and boosting your credit score, might be a good start.
There are several popular methods of allocating spending and saving amounts. One is the 50/30/20 budget, which sees 50% of after-tax income go fund your essential outgoings, 30% fund other monthly outgoings and 20% go into savings.
If you have several savings goals, you may find it more beneficial to go granular. As a guideline, you could allocate 60% of your income to essential expenses every month, then divide the other 40% among your savings goals. This 40% can be compartmentalised as you see fit between separate savings accounts: an emergency fund, a retirement pot, holiday savings, and mortgage savings, for example.
Maintaining and growing the fund
Automating a bank transfer that sends an allotted amount to your savings account after each payday is one great strategy. This means that it won’t matter if you forget to save during the month, because your bank will have already done it for you!
Regularly checking in and reviewing your progress towards saving should keep things on the right track.