How to build an emergency savings account
It’s impossible to plan for everything in life. Especially those unexpected events which often come at a cost. This could be anything from a broken down car to suddenly finding yourself between jobs. Taking out a credit card or payday loan can seem like the only option but they often come with high interest rates and expensive fees. That’s why it’s worth thinking about setting up an emergency savings fund to stop your bank balance taking a hit. This buffer can mean the difference between spiralling bad debt and staying on top of your finances.
How much should you save?
As well as unexpected expenses such as calling out a plumber, you also need to consider what will happen if your income is affected. This means putting enough money aside for essential outgoings such as rent, mortgage payments, bills and food. Generally, your emergency fund should be enough to cover three months’ worth of essential outgoings as it can take a while to get back on your feet.
However, the amount will vary depending on your circumstances which is why it’s important to assess your overall financial situation. You can do this by looking at how much income you have, the cost of your outgoings and if you have any debts to pay off. Work out how much you can afford to save each month and where you can cut costs.
How can you build an emergency savings fund?
Once you’ve worked out how much you’re going to save, look at the different types of accounts that are available. Can you withdraw money straight away? How easy is it to transfer funds and make payments? After opening your account, you can set up a standing order so that the money is automatically transferred over every month.
Is there such thing as too much?
If you have more than 6 months’ worth of outgoings in your emergency fund then you may want to make your money work harder by moving some of it into a different savings account such as a tax-efficient ISA or a Lifetime ISA (LISA). The added interest could help you pay off existing debts and start saving for long-term goals and investments.
How can you maintain your emergency fund?
Make it a regular habit to review your account and see how much money you’re saving, and how much you’re taking out. Has your situation changed recently? You may find that you’re able to increase the amount you’re saving or maybe you need to move some of it into a different account. If you’ve had to dip into your funds to pay for an emergency then you might need to think about updating your savings plan so you can replace them.
It’s tempting to focus on what’s happening today rather than what might happen tomorrow. But having an emergency savings fund could save you from potentially disastrous situations such as missing repayments on your mortgage. Putting money aside each month will also get you into good financial habits so that you’re in a better position to save for your long-term goals.