According to a study carried out in 2018, more than a quarter of British households have no emergency savings. This means that for 1 in 4 people, an emergency situation like an unexpected bill or a car breakdown would push them into debt. Building an emergency fund takes time and dedication, but it is an important step towards financial security.
If you are concerned about your ability to pay an unexpected bill, and want to start building your own emergency fund to act as a buffer between you and debt, then follow these five simple steps that will work no matter your income or your budget.
1. Calculate your magic number
Before you start, you need to know how much money you are aiming to save and how long it will take you to save it. Having a solid figure in your head will help with motivation when times are tough, and give you a strong sense of achievement once accomplished. Most experts agree that your emergency fund balance should be able to cover anything between one to six full months of expenses, including: rent, bills, and miscellaneous costs.
Go through the last six months of your bank balance and calculate how much you spend each month, and then create a fixed number for your savings target and how much you can afford to set aside each month. This will also give you the time frame within which you will need to be saving.
2. Be ruthless with your budget
This should be done alongside step one. When you are calculating your affordable monthly contributions, you should also be going through your budget to see where you can make savings.
If you are already operating on tight budget then this may not be possible, but by making savings in areas where you already spend money, and moving those contributions over to your emergency fund, you may find you are able to achieve your target balance in much less time.
3. Automate your savings
Maybe you already try to set aside money each month but sometimes you forget to do it, or are overwhelmed with larger than expected bills. By automating your savings and setting aside a set amount each month, or week, into a separate account, you are achieving two things.
Firstly, you are saving money, which is what you need to be doing, but secondly, you are treating savings as a “fixed cost” in your budget, which cannot be altered or ignored. By doing this you are also actively retraining your mental attitude towards saving and making it a habit.
4. Put it out of reach
Once you have decided your target, and set up your automated weekly savings amount then be sure to put this money somewhere out of reach. It should not be left in your main current account, as this may tempt you to spend it.
Instead, it should sit in a different savings account that you have dedicated solely to this purpose. If you put it into a general savings account with money for other goals (such as holiday money or a wedding fund), then you run the risk of dipping into your account too often and spending it on other things.
5. Get to grips with your debt
There are many different schools of thought about the best way to balance debt payments and savings. Some suggest you need to pay off your debt before you can start to save, whilst others advocate doing the two in tandem.
What’s most important for you when building your emergency fund is that you have a handle on your debt and are able to pay it off without falling victim to ever increasing interest payments. Furthermore, you need to make sure that you are not driving yourself into debt on a monthly basis by trying to find money to put towards your emergency fund savings. All your contributions should be made within your income, and should not push you to exceed it in any way.