An emergency fund is a necessity, not a luxury

Posted by TEBI on August 10, 2019

An emergency fund is a necessity, not a luxury

 

By JASON BUTLER

 

Life has a habit of throwing you curve balls. Some of those curve balls relate to money. Whether it’s your car needing repairs having failed its latest MOT, a school trip that your child forgot to tell you about, or the washing machine finally giving up the ghost, unexpected expenses often arise when you can least afford them.

And it’s for these unknown but inevitable but expenses that you need to have an adequate emergency fund. This is a sum of money that is held in an instant access deposit account that you can access to meet these unforeseen expense emergencies. And emergency doesn’t mean a takeaway pizza or that hen or stag party in Barcelona! It means those things that you absolutely must pay for but weren’t expecting.

Financial emergencies WILL come so you need to plan for them NOW.

MoneySavingExpert founder Martin Lewis advises to pay off any expensive debts before building an emergency fund, on the basis that the debts cost much more than any savings interest. While this might work for some people, for many people it won’t help them make lasting positive changes to their finances.

 

A starter emergency fund

Dave Ramsey is one of the most prominent and respected US personal finance experts. Dave recommends creating a starter emergency fund of £1,000 before trying to repay expensive debts. Dave’s rationale is that building a starter emergency fund helps build your confidence, reduces the need to use debt to meet future unexpected expenses, which will give you the breathing space to then start repaying debts. 

Even a starter emergency fund of just £500 would be a good start, so choose an amount that is realistic and appropriate to you.

To start off your emergency fund sell anything you own that you don’t need or want. According to Gumtree, the online marketplace, the average person has at least £881 of unwanted and unused ‘stuff’ that they could sell online.  Sell your car if you must and buy a cheaper one.

Even a starter emergency fund of just £500 would be a good start, so choose an amount that is realistic and appropriate to you.

My daughter recently sold some old textbooks for £50. That was less than she paid for them, but at least she has turned them into cash and someone else can use them.  What do you have in cupboards, the spare room, the loft, the garage or the shed that you could turn into cash?

If selling off clutter isn’t sufficient then you’ll need to cut your expenditure to the bone and/ or earn some more money until you’ve built your starter emergency fund. Do whatever it takes but build your emergency fund.

 

Get super-focused

Tell yourself that you have no right to spend on any non-essentials until you have done this. And that includes that tattoo you were thinking of getting, those shoes you have seen online or that impromptu night out after work. You need to be super focused on accumulating that cash and keep reminding yourself of how you’ll feel when you have.

Once you’ve got your starter emergency fund, you can then attack your non-mortgage debts.

When your non-mortgage debts have been cleared, you can then finish off building your emergency fund. The amount you need in your emergency fund will depend on your personal circumstances but as a general rule of thumb you should aim for between 3 to 6 months’ core living costs. So, if, for example, your monthly expenses are £1,500, you need to hold between £4,500 – £9,000 in your emergency fund.

You can get 1.5% on the best instant access accounts and while that’s not a high return, that doesn’t matter. Your emergency fund is insurance against those nasty but inevitable expenses that WILL arise, so that you can avoid taking on expensive debt.

What are you waiting for? Get selling that clutter now!

 

JASON BUTLER is a former financial adviser, based in Suffolk. He is a personal finance columnist for the The Financial Times, and is Head of Financial Education at Salary Finance. You can find out more about him on his website.

 

 

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