I’ve never been known as a saver. In fact, before I even hit my twenties I was in a stack of personal debt ended up on a debt management plan to pay it back for five years. However, since growing up, hitting my 30s and having a family, things have definitely changed for me. I have responsibilities now and can’t be so frivolous with cash. We do have debt, so I’m not perfect, but this is one mortgage which is obviously an investment and providing us with a family home. The other debt is two loans, one personal and one for home improvements. These will both be paid back in six years unless we are able to pay them back sooner. We have no other debt. Nothing on finance and no credit card debt. We do own credit cards, purely for emergencies and I also pay for everything on a Tesco card, then pay it straight back so we can get the club card points!
I’m definitely a lot more sensible with my money today than I was ten years ago. I do all the budgeting for our family each month and for around the past year and a half I make sure we save 10% of our income into a savings pot. My plan is to save six months’ worth of our combined salaries (after tax) as an emergency fund. That’s £18000 in total. I’m hoping to reach this target within three years, preferably two if I can top it up with extra. We do also save into a share save scheme which is another £60 a month and we’ve nearly completed three years which is the point we can cash out. So this will boost it a little for us this year.
Free stock image sourced from Pexels
Why save an emergency fund?
I feel a lot more comfortable when we have some money in savings and I’ll feel really satisfied when we have six months’ worth. Here are the reasons I think saving an emergency fund is a great idea:
An emergency fund will give us peace of mind should one of us not be able to work for a period of time. Just recently I hurt my back and was in agony for 4 weeks. Luckily I work from home and was able to continue, but if it were my husband Ben then he may have needed time off work. His work only pay two weeks sick pay per year, so if he ever had a long lasting injury or illness we would lose two thirds of our household income for however long. An emergency fund provides us with backup for this type of situation.
No job seems safe nowadays and we’ve known plenty of people who have been made redundant out of the blue. I have a fear this will happen and want to know we have enough savings to cover us whilst a new job is sought.
Whilst saving our emergency fund, we have had to dip into it on a few occasions already. Thanks goodness it is there! Just last week, after dropping my youngest at nursery, my car made a huge crunching noise as soon as I went to drive home. I couldn’t drive and had to call a breakdown service. Luckily I have breakdown cover so this cost was already covered, but if not then our savings would have covered it. What I didn’t have any cover for though was the £300 of repairs and labour it needed. Obviously we hadn’t budgeted for this so we took it from our emergency savings.
Early last year our vacuum cleaner totally broke. A plastic part snapped and we could no longer attach a tube. It was totally knackered. We didn’t have to panic as we were able to use our emergency fund to purchase a new one. Our fridge/freezer is also very old and we have been waiting for a while for it to completely fall apart or stop working! We are safe in the knowledge that when it finally does fail on us that we can choose a new one and not be without this vital piece of kitchen equipment as a family.
We aren’t perfect and we have dipped into ours a couple of times for other non-emergency household items, but I try to resist this as it will take longer to reach our goal. Setting an amount to save each month and treating it as an outgoing bill is the best way to start saving emergency cash.
What to do if you don’t have an emergency fund
If you suffer any of the above unexpected events and do not have an emergency fund saved then you may need to raise cash quite quickly. Here are your options:
- Ask your friends or family to borrow money. I hope as a parent I will have money to lend my children in the future for unexpected events, but I also hope I teach them well and they will be great savers. I’ve personally never asked family to borrow money as I’ve always preferred to finance myself and would be too proud or embarrassed to ask. I know my husband has turned to his family to borrow money though before we were together.
- Use a credit card. If you have a credit card already then consider using it and paying it back as soon as possible. There are lots of 0% interest rates available for purchases. I’ve been on 0% rates for a few years and apply for a new one as soon as my current deal runs out. This means I can borrow money without paying anything extra. I just pay back the amount I borrow. Obviously if you don’t already have a credit card then it will take time to apply for one and receive it, so it is not an option if you need cash fast.
- Follow my tips to make extra money from home or take part in some free money offers.
Some people choose to apply for a short-term loan, otherwise known as a payday loan, from a company such as Cashlady when they need cash quickly. Instant loans have become really popular in recent years as a fast way to get a small amount of cash, such as £80-£600, to tide people over for the unexpected. This options comes with a very high interest rate which means you have to pay a lot of money back compared to a standard bank loan. It's better to explore all other options first. You should always make sure it’s the right option for you, understand exactly how much you have to pay back and read all the small print before going down this route.
How to save for your emergency fund
The first thing you need to do is look at your incomings and outgoings. Work out a budget and know exactly where you are with money each month.
See if you can reduce any outgoings like subscriptions that are unnecessary or cut energy bills by switching supplier and so on.
Here are lots of money saving blog posts to get you started:
- Mustard promises to beat your cheapest car insurance quote
- Get money back for things you already buy
- Money saving tips
- How we saved £6500 in 6 months
- Free money offers
- £50 off your first Bulb bill and save up to £357 per year on your energy bills
Then, when you have reduced spending where possible and have a clear idea of your disposable income, you need to set an amount aside for your emergency fund savings. This should be treated as an outgoing along with the rest of your bills on the same day. Treat it like a bill and forget about it.
Make sure it's a realistic amount that you won't need for normal everyday purchases, or else you'll be tempted to dip into your emergency fund for everyday items.
It's best to set up a savings account that you have access to as soon as you need the money for an emergency. It's no good having it tied in an account you can't access for 90 days if your car suddenly breaks down!
In the UK you'll probably find an instant saver or cash ISA will suit your needs for an emergency fund, but the interest rates are not usually so high on these. Some banks like Natwest offer a savings builder with bonus interest rates if you increase your balance by at least £50 per month, so this also provides a good incentive to stick to your savings goals. In the USA there are also lots of savings account options, including some with easy access, low deposits and great interest rates such as these credit union savings account rates who offer 5.84% on the first $500 in their Truesaver. Both the UK and US offer great incentives to get your emergency fund started.
Whatever account you choose, the most important thing is to start saving. Even if it's only a small amount, it will help. Whilst you may rather spend that cash on something fun today, you’ll be thankful you saved it in the future when you run into an emergency and don't have to panic about where to find the money.
What to read next
Why I do what I do: my plans for the future.
How to raise the cash for an unexpected bill and my own debt story
What to do when you have debt you cannot pay
What to do if you’re struggling to manage your finances
4 Rules for Preventing Future Debt and Mastering Your Finances