Have you ever tried to save for emergencies?
In theory it’s easy enough. In practice, it takes a lot of discipline and willpower to save for emergencies. It’s so tempting to spend money, and with no end goal it can be hard to stay motivated. When you’re saving money for emergencies, it’s nice to have a figure in mind to work towards.
What your emergency savings should cover
Many people think small when it comes to planning their emergency savings amount. Often, people think about a specific large item in their house that they might need to repair or replace. Usually this is something like a boiler, a fridge freezer or a car.
It’s definitely good to build a fund to cover any essential big purchases, like repairs to the car or a new boiler if yours breaks down, but this isn’t the place to stop.
In fact, your emergency savings should total much more than just the cost of a new fridge freezer. Ideally, have enough to cover all of your bills and expenses for three months (for example, the equivalent of three months’ salary). The aim is to give yourself plenty of time to find a new job if you lose yours for any reason, or if long-term illness reduces your income.
Your savings fund should have enough in it to pay the rent or your mortgage payment three times over, as well as triple your monthly budget for food and triple what you usually spend on bills and other essentials.
How to build a savings fund
It’s best to take the slow and steady approach to build your emergency savings fund. It’s pointless to save for emergencies if you’re making yourself struggle day to day, so always be practical about how much you can afford to set aside. Even £10 a month is better than nothing, so don’t fall into the trap of thinking that you can’t afford to save money. See where you can cut back, to boost your emergency savings fund without putting yourself into financial difficulty.
A 25 year old UK resident on minimum wage would earn £268 per week by working full time hours. That’s £13,936 per year, or £1,046.97 per month. With the recommendation to save the equivalent of three times your salary, a minimum wage earner should be looking to build emergency savings of £3,140. That can be done by saving roughly £60 per week over a full year. If you don’t have that money spare then you can save a smaller amount each week, simply saving for longer.
What happens when you’ve built your emergency savings up?
Once you’ve built your emergency savings fund, ideally in an instant access savings account so that it’s there whenever you need it, you shouldn’t keep adding to those savings. Instant access savings accounts don’t offer the best level of interest, so opening an ISA or investing your extra money can provide you with a better return overall.
Is now the right time to build up your emergency savings?
In a majority of cases, it won’t make sense to build up emergency savings whilst you’ve still got debt in the form of short term and UK payday loans, long term loans and credit cards. You should pay off your debt before starting to save your money, but bear in mind that you’ll need to at least have money available for any smaller emergencies. Once you’ve cleared your debt and don’t have interest payments to be made, you can focus on creating a full emergency savings fund as your next priority. If you need to dip into your emergency savings, simply top them back up again.