Why it makes good financial sense to have an emergency fund

Worried about tough times ahead? Get the peace of mind of knowing you have a financial security net in place

Emergency fund

The Coronavirus crisis has hit household finances hard, and many people have lost their jobs, or found themselves trying to survive on reduced income.

And, with Government support, such as the furlough scheme, being withdrawn, this situation is only likely to get worse.

The pandemic has given us all a stark reminder that unforeseen events can happen – and that it’s a good idea to have money to fall back on. This will help see you through, and to face whatever lies ahead.

Why is an emergency fund so important?

Time and time again, research reveals that lots of people don’t have a savings safety net – or only have a very small amount squirrelled away.

But if you take a short-term approach to your savings, you risk leaving yourself vulnerable.

The economic uncertainty created by the pandemic makes it vital to ensure you have a cash buffer to cover unexpected emergencies or a period without income. If not, you could face financial disaster.

Slotting money away for the future may seem very challenging in the current climate, but you don’t need to save huge amounts to make a real difference over time.

How much should you have squirrelled away?

As a rule of thumb, you should look to have the equivalent of between three and six months’ worth of living expenses put aside.

To work out how much you need, tot up all your essential outgoings, and multiply this by the number of months.

A decent pot of savings will provide an important buffer against periods of financial insecurity. It will mean you will still be able to pay your rent or mortgage, and afford essentials, such as food and utility bills.

Where should you keep your rainy day fund?

You need to keep your emergency saving in a safe place.

This also needs to be somewhere you can get your hands on your cash in a hurry – without having to give notice.

The best option is likely to be an easy-access account.

Compare rates

Given that interest rates on savings are at a record low at the moment, you need to do your research when choosing an easy-access account to find the best rates available. You can compare rates here.

But note that the top-paying easy-access accounts aren’t hanging around for long – so you need to act fast to bag a good deal.

Read the Ts and Cs

Always read the Ts and Cs before opening an easy-access account to check things such as the minimum and maximum deposit, and whether there are any limits on the number of withdrawals you can make per year. Ideally, you want an account that you can dip in and out of easily, without restrictions.

Equally, if the account comes with an introductory bonus, you need to note down the date when that’s due to end. If the rate at that time is no longer competitive, you need to be prepared to move your money elsewhere.

Top tips for building up a rainy day fund

  • Make a point of keeping your emergency fund separate from your day-to-day account where you keep your spending money. This will ensure you don’t unintentionally – or intentionally – dip into money set aside for savings.
  • One of the best ways to build a rainy day fund is by setting up a direct debit to go from your current account into your easy-access account on payday each month.
  • If you are struggling to free up cash to save, look closely at your spending to see where you can afford to cut back, and what you can manage without. Simple steps could include cutting out take-away coffees, cancelling subscriptions to services you no longer use, and shopping around for better deals on essentials, such as your energy bills and broadband.
  • Don’t be disheartened if it takes a while to build your emergency fund. It could take months – or even years – to get to a level that you’re happy with. The key is to get into the savings habit, and to stick with it.

Can’t I just use a credit card?

You might think that if you face an unexpected expense – such as a boiler breakdown or your car failing its MOT – and don’t have an emergency fund, you could just put the cost on a credit card.

The problem is, unless you’re careful, card debts could soon rack up, and you may find yourself in a position where it’s hard to pay off your plastic.

Choose a 0% purchase card

If you have no choice but to turn to a card, then make sure you seek out a 0% purchase card. With this type of card, you can spread the cost over a period of time without paying interest.

You can currently get as long as 20 months at 0%.

But don’t forget that with any purchase credit card, if you fail to clear the balance before the interest-free period ends, you will be charged interest. Do all you can to repay your plastic before the high rate kicks in.

Better still, work hard to build your emergency fund. That will give you the peace of mind of knowing you can survive a situation without having to borrow to make it through.

Representative example: If you spend £1,200 at a purchase rate of 19.9% (variable) p.a. your representative APR is 19.9% APR (variable)

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