Finance > Saving
Emergency Fund Explained
An emergency fund is a pot of cash put aside for unexpected life events that hold a financial burden. Whilst it may seem pointless in the good times, unexpected financial stress can come from various sources, e.g. job loss, medical emergency, and car issues. Hopefully, you will never touch this money, but it is there if you need it.
In This Article
How Much Should I Save?
It is suggested that an emergency fund should equate to 3-6 months of living expenditure. However, the amount held in the emergency fund is fluid, and you should ensure it suits your personal circumstance. For example, if you move from living rent-free with your parents to renting your own apartment, your emergency fund must increase to cover your new rent and bills.
Bottom Line:
If you had no income, how much cash would you need to survive the next 3-6 months?
You may need to think about the following expenditure when determining the level of your emergency fund: transport, food, bills and rent. Spending on social activities (i.e. going out for dinner) does not play a part in determining the level of your emergency fund, as these sort of activities would likely stop in the case of an emergency.
Where Should I Keep My Emergency Savings?
There are two key factors to consider here:
- Risk
The money needs to be in a risk-free account. A high-interest savings account is perfect – you’re guaranteed that the amount will not go down, and you will get a reasonable interest.
- Accessibility
It is important that these funds can be accessed anytime, without withdrawal charges, so consider this when picking an account. It is also worth having an account separate from your regular savings for the emergency fund; this stops the temptation to spend it – out of sight, out of mind!
Benefits of Having an Emergency Fund
- Less stress
In the case of an emergency, it ensures you don’t have any unnecessary financial stress and can focus on what really matters.
- Avoids bad debt
Without an emergency fund, you may be forced to borrow, leading to increased debt in the future.
- Encourages saving
By building up an emergency fund, you are more motivated to save and ignore spending temptations.
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