Use these five simple principles to start an emergency fund - even if you’re living paycheck to paycheck
The importance of having an emergency fund is often spoken about, but it can feel impossible to even think about building up six months of expenses when you struggle to make it through the current month as it is.
We’re going to break down our favourite, simple and practical principles that you can follow to start developing your own emergency fund today – without tons of cash to spare. But first, you need to set a goal and work out how much you really need to set aside.
Using our simple budget sheet free download can help you get started.
Up to six months of living expenses is often seen as the default target for emergency funds. This means that, in theory, you could lose your job and still not have to worry about money for up to six months.
Whilst this could be an aspirational target to work towards over the years, you can certainly achieve a reasonable level of security without quite this much.
At its most basic, an emergency fund is just that – money set aside for emergencies. Realistically, most emergencies such as a broken down car or boiler will cost a few hundred pounds. Even having £500 set aside for a rainy day can be the difference between dipping into interest earning savings or having to turn to expensive, short-term debt options.
Some banks such as Monzo and Revolut even help you to estimate exactly how much you’d need to have put aside for a month of essential expenses – which can be really useful if you don’t know where to start!
The most important thing is to have a specific figure you’d be happy with and prioritise this as your first, realistic goal.
FIVE TIPS TO START BUILDING YOUR EMERGENCY FUND
Start little and often. Consistency is key!
When it comes to saving, always remember that something is better than nothing. Just £10 per week could mean you finish the year with over £500 which would go a way to covering unexpected costs that arise.
If you can, try to automate this process or set a reminder on your phone to complete the transfer at the same time each week. If you’re struggling to remember, some newer banks have a ‘round up’ feature which will round up your transactions to the nearest pound and put the rest into a savings pot.
Whatever you do - staying consistent will mean your savings build and compound over time.
Put any unexpected money into your fund
If you receive a bit of extra money, whether it’s just a little from a cashback offer or a hefty tax refund, make sure you put this towards your emergency fund.
If you usually see this surprise cash as an excuse to treat yourself, a change of perspective to put this into a savings pot can make a big difference to the time taken to reach your goal. It might feel boring at the time, but don’t forget that once you reach your goal there will be plenty more opportunity for treats!
Put a time delay on your spontaneous purchases
It’s pretty rare that you ever need to buy a non-essential item right this very instant.
By delaying any spontaneous purchases for a few weeks, you’ll have the time to evaluate whether it’s something that you really need - or whether you were just scratching an itch for a delivery to look forward to.
Plus, doing this means you can look out for deals in the meantime, so when you do come to buy you know you’re getting the best price.
Make simple swaps to free up some extra cash
If you feel you’re living paycheck to paycheck, it’s time to take a good look at your finances to see where you could free up some extra cash. More often than not, it’s the little purchases that add up and eat away at our bank balances.
Swapping a coffee out for a flask from home, making time to walk rather than jumping in an uber, or prepping a cheap lunch instead of store-bought can free up the £10 cash per week needed to build your emergency fund.
Keep the money somewhere you can’t see it
When saving for anything, the temptation to dip into the growing pot of cash can build at the same time. By keeping your emergency fund in a separate account from the one used on a daily basis can mean you don’t always have to look at it.
Newer banks, such as Monzo, Revolut and Starling, will even let you lock away your savings until a specific date. Whilst it is possible to override this and access your money in an emergency, it will provide a handy reminder as to your goal if you ever feel like dipping into it.
”Start small and make steady progress. Over time, your fund will grow, giving you peace of mind and financial security when unexpected expenses arise.
EmanFinancial Adviser, OnestopSave
This information is intended for editorial purposes only and not intended as a recommendation or financial advice