You've heard the saying, "an ounce of prevention is worth a pound of cure." Well, the same goes for emergency savings. If you don't save enough money for emergencies, they'll catch you off guard and cause you financial hardship.

Emergency savings are those funds you put aside specifically for unexpected expenses. They can include things like medical bills, car repairs, or even home improvements.

Saving money for emergencies is important because it helps you avoid having to borrow money from friends or family members. The sooner you start saving, the better.

Today I will explore how much you should have in your emergency savings and how to achieve the goal easier.

The Issue Today

There are many shocking statistics on peoples current savings in the western world. For example, according to aldemore nearly half of UK adults (47%) do not have any emergency savings set aside and out of the ones that do, only 1/3 have enough money to cover 1 months of expenses.

This means nearly half of UK adults are living week to week or month to month on the money they get, never progressing their wealth in any meaningful way.

This issue can result in people having to make bad financial decisions such as using credit cards to cover emergency expenses which adds to their credit card debt. This of course can end up as a long-term liability of these debts aren't paid off in time.

How much do I need?

Figuring out how much you need to save for your emergency fund savings goal can often be quite a simple process. Most financial experts would recommend having at least 3 months of essential expenses saved up. This could mean that you have a few thousand pound sitting around just waiting to be used.

It's important that I emphasise ESSENTIAL expenses. So this shouldn't include your disposable income each month within the calculations. Basically any expenses you need to survive including shelter, food, gas & electricity. You may have other essential expenses such as transportation however this will vary person to person.

If you are wanting to ensure you have enough money for an emergency then you should aim to build up a minimum of 3 months however if you want to be extra secure then you can build up a 6 month emergency fund. This will give you the peace of mind that if anything goes wrong in live such as losing a job. You can in theory live for up to 6 months without having to receive another payslip.

Plan Ahead

To ensure you firstly understand how much you need to save to meet your 3-6 month emergency fund goal and to plan saving for that goal, you will need to create some sort of budget. Having a budget will allow you to see where your money is going and what areas you need to improve on.

This will also help you break down your monthly income to find out exactly what your essential expenses are to find your emergency fund goal while allowing you to see how much money you can put away each month to progress to that goal, even if it is only £10 per month, something is better than nothing.

For a bit of help on figuring out how to create a budget and the benefits of doing so, you can checkout our blog post below on apps to help you get started budgeting:

https://portfolio-hub.co.uk/blog/5/the-best-apps-for-budgeting-uk

Where to Keep an Emergency Fund

Now we know how much you need to set aside but where should you keep it?

The best place to keep your emergency fund is in a high-yield savings account that you can preferably access easily with a bank or building society. This way you can earn interest on your money which will help boost your savings and allow the money to fight inflation, a little bit.

One of the struggles I used to have when starting my emergency fund was trying not to dip into it from time to time thinking, "oh it's only a tenner" or "I'll put in extra when I next get paid". Well this sort of thinking tends to eat away at an emergency fund much faster than you would think.

This is why when I wanted to take my emergency fund more savings I made it a bit trickier for me to access the money. Still being easy enough to access that I could get it within the same day however I had to actually put a bit of effort in to transferring the money across which usually deterred me from taking the money out for little things

The way I overcame this was by simply opening a savings account with a different bank then my main current account. This meant the two accounts weren't within the same internet banking app so I couldn't transfer it across as easily.

Then, to further increase the difficulty of me getting my funds out, I ensured I never setup the app for the savings account on my phone. This meant I had to go onto my PC or my phone and log into the bank directly. This meant I had to input more information to log into my account which would also deter me from "dipping" into my savings.

In addition, some may choose to put there emergency fund within an easily accessible index fund such as a Vanguard ETF. This of course means you can't access your funds immediately, usually 2-3 days to withdraw the money so having some money you can access immediately will still be desired. 

This option of keeping your emergency fund within an index fund will help your money still grow over time especially if you have a larger emergency fund and don't want your money to just be eaten away by inflation.

When should I use my emergency fund?

This should go without saying, but you should only be using your emergency savings for a real emergency. This could be classed as an unexpected event such as a kitchen appliance breaking down or a cars tire going flat. This should not be used for a spontaneous night out with your friends.

Of course, if you have exceeded your savings goal then feel free to use any extra how you please, but when building your emergency fund you should be focused on hitting that target no matter what. Any extra money you gain in this stage can also go towards building your emergency fund to provide you with added safety.

Summary

In summary, I hope this article has helped you understand how important an emergency fund is and how much you should save for one. If you'd like any further advice on how to start saving for your emergency fund or planning your financial goals feel free to comment below!

If you found this helpful please share it with others who might find it useful.

Thanks for Reading 😊

FAQ

How to build up your fund

While it's a good idea to set up your emergency fund as soon as possible, it's best to keep to what you can afford and try to save regularly.

Source: (moneyhelper.org.uk)

How Much Should You Have in Your Emergency Fund?

When it comes to deciding how much to keep in your emergency fund, there's no one-size-fits-all approach. But a good rule of thumb is to set aside enough money to cover three to six months' worth of living expenses, including rent or mortgage payments, grocery bills and car payments.

Source: (experian.com)

When should you use this money?

The goal is to tap your emergency savings only for expenses directly related to an unexpected emergency. By setting a specific dollar amount that should be in that account, you will know how much to build up to. When you draw from the emergency savings, you'll then know how much to contribute in order to replenish the account. When you do have to take money from this fund, it's important to immediately start rebuilding it. Remember: If you start saving now, the money you save today can go a long way towards meeting your needs when the next emergency occurs.

Source: (wellsfargo.com)