We’ve all been there. You’re halfway through the month with a couple of bills coming up - then suddenly the boiler breaks or your car won’t start, and you’ve got another last-minute expense to take care of.
Emergencies and unexpected bills are a fact of life. So why are so few of us ever prepared for them? It’s time to stop panicking and start saving for an emergency fund instead. Here’s how.
What is an emergency fund?
An emergency fund does what it says on the tin. Your emergency fund is made of savings put aside for emergencies only. You shouldn’t access this money for any other reason, including regular bills, fees, or other expenses.
An emergency fund can sound like a bit of a project to start saving for. Don’t panic, though! It’s easier than you think to start your fund - and to build a sizeable saving for when you need it most. Here’s how.
Start with a budget
The first step is to create a budget. There are lots of tutorials online to help guide you through the process. Use your budget to go through all of your monthly incomes and expenses until you’ve got a solid overview of where your money goes every month. If you’ve already got a budget, take some time to look through it and make adjustments if necessary.
Setting up your budget does two things. It allows you to account for all your regular bills and expenses. This helps you to see how much money you can save every month safely. You’ll want to spread this cash across multiple savings accounts, like your emergency fund, your pension, and any other saving funds.
Having a budget also allows you to see where you’re spending in order to cut costs and use your money more efficiently. If you can see that you spend a little too much on takeaway or travel each month, maybe it’s time to start finding cheaper alternatives. This will give you more money to save.
Set some goals
Saving doesn’t have to be a chore. When you know exactly why and how you’re saving, you can feel empowered and motivated. To help your emergency fund get started on the right track, set yourself some goals for the next year.
Remember to be realistic. You want a goal that will push you without asking too much of you. Think about how much money you’re physically able to save each month whilst considering your lifestyle at the same time. It’s easy to set ourselves lofty goals and then feel disheartened when we haven’t achieved them in time.
Be realistic about your goals
If you splurge a lot, pick a smaller number to begin with and give yourself more time. This helps you get into the swing of saving regularly.
If you’re on an average income, aiming to save £1,000 in six months is a realistic initial savings goal. This is a doable amount of money in enough time to account for any hiccups along the way.
Focus on small wins
After you’ve set some savings goals, it’s time to break them down into smaller steps. Don’t wait until you reach that £1,000 to celebrate! Instead, focus on saving your first £100. Then, work up to £200, and so on.
This way, you’re setting up regular, little victories. This is a clever psychology hack that gives us a boost while we work towards larger goals. Recognising your achievements while you work towards your big goals helps to keep you motivated. It takes longer to save £1,000 than to save £100 so it can be disheartening to feel like it’s taking ages to achieve your goal. You’re less likely to give up if you’re seeing progress regularly.
And remember, those small wins are still wins! Be sure to celebrate in little ways and feel proud of all your progress. Focus on the process of reaching your big savings goals and you’ll get there in no time.
Open a savings account
Start saving into an account that you’ll use specifically for your emergency fund. You need a savings account that allows for withdrawals at any time and preferably one that has a good interest rate to help boost your fund over time.
There are lots of different types of savings accounts that allow you to withdraw your money at short notice.
Open a savings account specifically for your emergency fund
Cash ISAs offer tax-free interest on savings up to an annual limit whilst easy-access savings accounts often provide an ATM card so you can physically withdraw cash if necessary. Be sure to research your options and choose an account type that works for your emergency fund needs.
By ensuring you only use this account for your emergency fund, you’re reducing the likelihood of using your savings for any other purpose. Plus you’ll have an accurate view of exactly how much you’ve put into your fund at any time.
Save every month
There are no excuses! In order to build up savings of any kind, you need to save regularly and consistently. The best way to save is to ensure you’re putting away money every single month.
To make this easier, try to automate your savings. By setting up a standing order or automated transfer into your savings account, you can’t forget to contribute to your fund each month. A handy tip is to schedule this process for right after you get your paycheck. This way, your money is safely in your fund before you have the chance to spend it.
If you don’t have a regular income, you can adjust your savings as necessary. Keep track of how much you’re putting away each month by using an app like Money Dashboard. If you have to contribute less this month, try to make up for it next month. Remember, every little helps. What matters is that you build a habit of saving every month so it becomes a natural part of your life.
Only use your savings in an emergency
This can be the hardest step when setting up your emergency fund! In order to have an emergency fund when you need it (you know… during an emergency!) you need to make sure you never spend this money on anything else.
While initially this might be difficult to maintain, with the right planning and motivation, you’ll quickly get used to leaving your emergency fund alone until you really need it. Be sure to work with a budget so you have enough money to play with after saving, and remember to celebrate small wins regularly to keep yourself enthusiastic about your fund.
Above all, remember that an emergency fund gives you peace of mind. An unexpected bill or other emergency is inevitable for all of us. Knowing that you’ll be prepared when that time comes allows you to relax and enjoy life right now.
With a few easy steps and a change of habit, you can set up your own emergency fund for long-term security. Share your thoughts and experiences with savings funds in the comments below.