How to build an emergency fund

Millennials today have already gone through a whirlwind of financial uncertainty, we’ve lived through the great recession 2007 to 2009, we’ve seen housing inflation shoot through the roof, we’ve experienced Covid 19 and are still living its repercussions, and we’re currently mid cost of living crisis. What a ride, hey? On the back of Covid 19, governments are now in a lot of debt across the world, and many experts predict another recession is on its way. When a recession hits, this could have an impact on employment, meaning jobs may very well be cut.

My goal here is to help you build an emergency fund for any unforeseen circumstances that may incur unexpected expenses. Life is full of twists and turns and even though we’re well aware of this as we live through it, it’s amazing how many of us still aren’t prepared.

Let's delve into the details and formulate a financial strategy to save money for emergency savings that can weather life's uncertainties.

Firstly, what is an emergency fund?

Glad you asked. An emergency fund also known as emergency savings can be like a monetary safety harness – an allocated sum of money tucked away especially for unforeseen circumstances. This could be if you lose your job, or your car breaks down, or you need to pay for an unexpected big bill.

Whatever the reason, this fund is there to ensure that when something unexpected happens, you have enough money for unexpected expenses and you’re not immediately scrambling around to find the finances to cover it, which could put you into debt. I'm not talking about fuel costs or credit card debt, these should be covered in your 'bills' bank account as these occur monthly, an emergency fund is for the unexpected, such as home repairs or other unexpected events.

Why should I have one?

As mentioned above, the main reason to have an emergency fund is to avoid getting into debt when something unexpected happens. The emergency fund protects you from being forced to take out a high interest loan, or remortgage your house if you want to go down the drastic route.

But it’s not only that, having an emergency fund also gives you confidence and takes away anxiety. We’re no stranger to anxiety, millennials especially have been deemed as one of the most anxiety ridden generations – so if you have emergency savings, it protects you from taking drastic measures that will affect your cash flow. For example, if you lost your job. If you didn’t have money to cover you for a little bit your anxiety would be through the roof, this helps curb that slightly, and will help you make a more solid decision on your next steps, such as when you choose your next role. If you have no money and have to get a new job straight away, you would take anything, even if it’s not what you want to do and maybe even a downgrade in pay. With the emergency fund, you have time to take a break, assess your next moves, and search for the right opportunity.

Crazily, within the UK, a considerable segment of the population finds itself teetering on the brink of financial instability. Recent studies underscore that approximately 60% of individuals lack a designated emergency fund. Additionally, close to 50% of the population lives payday to payday, and a substantial portion is grappling with the burden of debt. Starting this savings habit will boost your personal finance, financial well being, and even help you towards your financial goals.

How much should be in my emergency fund?

So this really depends on you, a common guideline recommends striving for an emergency fund equivalent to 3 to 6 months' worth of living expenses. But there are some things you need to take into consideration. For example, if you lost your job, do you work in an industry where you could easily get another one within 3 months? Do you have a super expensive car which would set you back quite a bit of money if it broke down? Run through scenarios in your head, and work out how much money you would need to cover if something drastic happened.

Personally, I would always go for 6 months. You never know how life is going to turn out, and I’d rather be over cautious than under prepared. Nobody expected the pandemic to completely flip the world and the way we live upside down for 2 years, I’m still not over queuing around the car park to get into Tesco.

You should know your monthly expenses already, if you don’t, read my how to set a budget blog. Once you know this, times that by 6 to work out how much you need to save. This should include food, utility bills, rent, etc. Basically everything you spend in a month. This sum serves as your target for the emergency fund. While this objective may appear imposing, remember that each contribution is a step toward the goal and that will help you save money.

Building your emergency fund – A step by step guide

Step 1- Clearly define objectives

Establish a specific target amount and how long you think it will take you to build it. If you have a set amount and timeframe this will help with your motivation and maintain your focus.

Step 2- Create a budget

As mentioned above, my blog on how to set a budget goes through this, it also includes building an emergency fund so check it out for some tips on allocating money for this and get into the savings habit.

Step 3- Automate contributions

Automating payments is one of the best things to come out of advancing technology in the last 30 years. Simplify the process by instituting automatic transfers from your current account to your designated emergency fund. This technique does the discipline for you.

Step 4- Watch it grow and add to it if you can

Sometimes our emergency savings may not grow as fast as we’d like, and if you’re starting an emergency fund because you’re worried about your current situation, you want it to be there as fast as you can. It depends on your personal finance situation, but if you can afford to put a little extra to it if you have it left over at the end of the month, do so.

Fear not, I have some further tips.

• Save as much as you can of your remaining money. If you’ve taken my budgeting advice and are moving your money into certain buckets, you should have already moved your designated saving amount into your emergency fund at the start of the month. However, you can always add to it if you cut back on your discretionary spending for a bit. Make small changes like going out less, or eating at home. Read my 25 tips on how to save money blog, and apply them to your spending habits. Whatever’s left over at the end of the month, you can pop into your emergency fund.

• Sell anything you don’t use anymore. This is such a game changer and so many people don’t do it. There is probably so much in your home that you don’t use and could make money from. Have a clear out, if you’ve not used something in 3 months, sell it. Let your inner hoarder go and jump on this bandwagon.

• Explore supplementary income streams. Side hustles, we hear a lot about them, particularly now they’re a hot topic. If you can pick up a side hustle, this could massively boost your emergency savings and get you there quicker than you’d planned. Think outside the box on what could make you some additional income using skills you already have, you may be surprised at what you come up with.

• Cut back on discretionary spending. This could mean less shopping online or going out and socialising, but you'll thank yourself for it in the long run. Also look for deals, such as money off vouchers or discount vouchers, or free activities to do.

Where do I keep my emergency fund?

The million dollar question after the million dollar question of how do I build one. As I’ve said before, your emergency fund should always be kept separate from any other money, so you won’t be tempted to use it.

Now this is where you need to get a bit smart and a bit strict on yourself. When choosing a savings account to put your emergency fund into, there are two things you need to consider, which are interest rates and ease of access.

Interest rates and ease of access

Now the tricky part is, high interest rates usually come with a condition, and that’s usually difficult access. Accounts that offer the highest interest rates in savings are usually accounts where you need to lock your money away for a period of time, so this is where the balance needs to be found.

Emergency savings need to be accessible in an emergency, (it's the whole point) so I would suggest staying away from long term restrictions where your money is inaccessible. Instead, look for an account with the best interest rates and easy access.

Luckily for you, I’ve done it for you. Read my best easy access savings accounts 2023 blog and see what’s available to you for your emergency fund.

While this isn’t the most thrilling topic to be discussing and may seem like yet another burden placed on your shoulders (welcome to adulting), it is essential to build an emergency fund not only to protect your finances but also your peace of mind. Next time life throws you a curveball, you’ll be prepared, and not only survive it with minimal mental breakdowns, but you’ll come out swinging!

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