One of the worse mistakes I made whilst I was at university was to run out of money. I had a budget for the term and I ran out. Seeing the £0.00 balance in my account was a very scary thing. I had savings in another account, locked away, but I didn’t want to use them. I’d set myself a task of sticking to a budget (which was pretty generous at the time) and I failed. I needed to work out why I’d failed and what to do next term to ensure I didn’t make the same mistake twice.
Moving forward quite a few years, me and my husband have the same set up. We have savings that are in various different accounts, but we’re not to touch them. We pay ourselves first into different accounts, and then pretend that money isn’t actually there. It’s ear-marked for different goals and priorities. However, one of them is now our Emergency Fund.
An Emergency Fund is exactly that – money you can use in an emergency. Whether that’s because your washing machine suddenly doesn’t work, or you break down in your car in the middle of nowhere or you get an unexpected bill; you’re okay because you’ve got an Emergency Fund set up and funded for just this type of emergency. Or, the worse scenario of all where you are made redundant, and end up un-employed for a while. This is where the Emergency Fund money really is vital, to give you time and peace of mind in a particularly stressful situation.
The general rule of thumb is to keep 3-6 months of essential outgoings money in your Emergency Fund. You can work this out to suit your own needs quite easily. Essential outgoings can also vary from person to person, depending on what you think is “essential”. In our Emergency Fund we’ve got 6 months of mortgage payments/council tax/water rates for the moment. We haven’t included things like gas/electric/food in ours at the moment, though this might change in the future. However, we are slowly adding to ours all the time, so that eventually we will have 12 months worth of essential outgoings sat in there, just in case. Now, some might argue that this is too much money to be sat around not doing very much, however the point of an Emergency Fund is that is can be accessed quickly, in an emergency. So, our plan is to continue to drip feed money into our Emergency Fund over time, now that we’ve got it to a satisfactory level for us, for now.
The reason why an Emergency Fund is so important is because it gives you peace of mind. Because you know that if something were to happen, you have the funds readily available so that you can sort whatever the situation is out. If you need to buy a new washing machine, you can. If you need to pay to have your car towed and then fixed you can. If you’re suddenly unemployed, you can manage for a while whilst you find yourself another job or start a new venture for yourself.
In essence, an Emergency Fund gives you the freedom to not have to worry about an emergency.
Do you agree? Do you have an Emergency Fund? What amount are you aiming for? I’d love to hear about it in the comments!
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