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I have a brilliant collaborative post for you today that talks about the merits of the emergency fund. I love it, because the emergency fund is my most favourite savings goal, and one I think EVERYONE MUST HAVE.
If you don’t have one yet, you’re not alone.
According to the 2015 Financial Capability Strategy for the UK, fewer than 50% of the population have a significant emergency fund. That’s 27 million working age people in the UK.
Are you one of them?
What’s in an emergency fund?
An emergency fund consists of two parts:
- £500-1000 (or your currency equivalent) to cover you in an emergency. This might be a boiler breakdown, or a car repair. Its enough to avoid needing to take on a short-term, high-interest pay-day loan.
- 3-6 months worth of basic living expenses to cover your rent/mortgage, bills and food in the event that you cannot work. Save more if you think you need more of a buffer. Its not for holidays, or nice clothes, fancy restaurants or treats. Its basics only – food, shelter, transport. That’s it.
Why am I so passionate about this?
I think the benefit of working as a doctor in A&E, is that I see the real-life emergencies and it gives me a crystal clear perspective. I see the life-changing accidents, and the long-term health conditions. I see the early, unexpected deaths. I see families fall apart.
It often gives me food for thought.
I now have an emergency fund. I didn’t in 2015. I was one of those 27 million. This year, my goal is to have 3 months of basic salary in my emergency fund. Its not an easy task, but I see it as a necessary one – ESPECIALLY if you have lots of overheads and debt.
Yes, you could pay off your debt with the money you save, but what happens when you need a quick lump sum of cash because the washing machine broke? That’s right, you’ll go back into, or deeper into debt again UNLESS you have a buffer of money ready.
If 2018 is the year you are serious about paying off debt, then you MUST have an emergency fund so that you can break the cycle from using debt for small emergencies for good.
Need more convincing? Read on….
There is no doubt about it that life is full of surprises. All manner of things can happen to put you in difficult financial straits. But that doesn’t mean that you can’t be prepared to deal with them. Setting up an emergency fund is a vital step that you should take now if you haven’t done so already. To illustrate just how important it is to have one of these, we are going to be talking about a few life shocks which could happen to you at some point down the line.
Job Loss or Maternity Leave
Whether you are fired, made redundant or choose to leave your job for personal reasons, having an emergency fund provides you with that safety net while you get back on your feet. That it is why it is a good idea to have 3-6 months of salary in reserve in case you need it.
The same goes for maternity leave. Could you survive on £140.98 per week? This is how much you’ll get on statutory maternity pay after 6 weeks of being on leave. Some women need to return to work quicker than they would like because they simply can’t afford not to.
Sudden Life Change
There are some things which are very difficult to plan for. A sudden illness is one of them, and even if you are covered medically, you may end up with a loss of income. Even worse, a death in the family could happen. Having money to cover funeral costs can give you the flexibility to truly compare funeral directors, so that your family can go with the company they want, rather than the company they have no choice over. Though no one likes to think about these things happening, you are better off being prepared if/when they do.
Cost of Living Increase
The shock that occurs could be something as simple as a cost of living increase caused by a sudden change in the economy. Your rent or mortgage payments may suddenly skyrocket or your household bills could take a sudden upward turn. Having an emergency fund will help you to cover these costs while you get your finances back on track. Keep an eye on when bills need renewing, and always switch to get the best deals!
If you rely heavily on your car, any problems that occur could cause you a major financial headache. Even simple repair work can be costly, let alone having to pay for a replacement. This is a stressful situation for anyone, but having an emergency fund can help to mitigate against this, so you can get back on the road as soon as possible. This is especially important if you have no other means by which to get to work!
Major Household Repairs
Even if you have insurance to deal with the most obvious issues, there are still plenty of minor ones which could hit your purse. When you are deciding whether or not to dip into your emergency fund, determine how much of an emergency the household repair is and whether or not it is something you can delay until the next payday.
Unexpected Move or Trips
Perhaps your company has transferred you to a new office or you need to make a sudden move to be closer to your family. There are all sorts of expenses involved in this including movers, temporary housing, and the costs involved in furnishing a new place.
And what if you live abroad? Could you afford the plane ticket home if you had to leave suddenly?
Having an emergency fund gives you flexibility. It gives you choice. It avoids those dreaded payday loan temptations. So, hopefully, this article has encouraged you to start up your own emergency fund if you have yet to do so already.
If you want help getting one together, why not try out my 7-day Money Kickstarter challenge? Day 5 gives you plenty of ways you can start bringing in more cash that you could put towards your very first emergency fund.
You can, and you must prioritise this for 2018. I can’t wait to see how you do – come and find me in my free private Facebook group!