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What is an emergency fund? | YBS
An emergency fund is a pot of money that’s been set aside to cover unexpected costs. Having an emergency fund can protect you from the impact of a sudden bill or expense – and help you avoid borrowing money.
What are the benefits of an emergency fund?
If you haven’t got an emergency fund – you’re not alone. We asked our followers on social media if they have money set aside for emergencies. Of 315 respondents, 28% didn’t have any money allocated for unexpected costs.
There are lots of situations where an emergency fund might come in handy, for example:
- Sudden job loss
- Being unable to work due to illness
- Damage to your home or car
- Vet bills
- Household appliances – like a broken boiler.
A pot of money set aside to cover sudden costs, or support your everyday expenses if you’re not earning as much (or at all), may help you to save money in the long term.
This is because you might be able to avoid borrowing money and the added interest payments that brings – which could put an even greater strain on your finances.
What happens if I don’t have an emergency fund?
A sudden cost without a safety net could mean using credit – like an overdraft, credit card or loan. This might make your finances tighter as you pay it back.
For example, if your car breaks down, taking out a loan for the repairs could mean you’re not able to save for the following months – and risk falling into debt.
How much should I have in an emergency fund?
How much you can realistically afford to save for an emergency fund is different for everyone. No two people’s finances are the same. Your outgoings and income are sure to affect how much you can put away – and how quickly.
Making a plan to save up a safety net is the first step to protecting yourself from the impact of sudden expenses.
Set an emergency fund goal
First, decide how much money you’d like to put aside. This can be based on potential costs, for example, £2,000 might cover the price of a new boiler if it breaks.
You could also use rent or mortgage payments as a guide. If you were to lose your job suddenly, would you be able to cover these big monthly outgoings?
Three months as an emergency fund target
Aim to have three months’ worth of rent or mortgage payments saved up, plus your other living expenses such as utility bills, food and transport. This pot could make life easier if the worst should happen, tiding you over while you search for your next role.
Once you’ve got a set amount in mind, you can start planning how much you’ll need put aside to reach it.
How to build an emergency fund
If you haven’t got much – or anything – saved for an emergency, it’s never too late to start.
Three months of living expenses might be the ideal amount, but any amount of money for a sudden cost may help.
What type of account is best for an emergency fund?
You’ll need a savings account that can be accessed when you need it. Some accounts might have limits on how often you can take money out.
Set up a standing order
Add to your emergency balance automatically on payday by setting up a standing order. Use our savings goal calculator to work out how much you’ll need to put away every month.
Keep it topped up
If you have to use some or all of your emergency fund, don’t fret – that’s what it’s there for. But make sure you create a plan to replenish it, so you’re protected for next time.
