As the world is reeling from the unprecedented financial chaos of the COVID-19 global pandemic, money matters have never been a more pressing concern. This economic collapse is causing even the most financially stable families to think about money in a new way. More than ever, it is also demonstrating the need for everyone to have an Emergency Fund.

You might think, ‘oh, I’ll start saving for an emergency fund when I can afford it.” The truth is that you can’t afford to not have an emergency fund. It can save you and your family from financial ruin when you are at your most vulnerable – it’s just that important.

What is an Emergency Fund?

Simply put, an emergency fund is a savings account that you purposely set aside to help you handle the difficulties in life.

An emergency fund gives you a financial buffer against any unexpected events in your life. Of course, that includes a global pandemic, but could also help you in times of job loss, household repairs, personal crises, or other unforeseen emergencies.

An emergency fund is not meant to be used for holidays, clothing sales, or as an excuse to have a blow out at the pub! It should only be used when you are in a financial bind that you cannot afford to pay for with your liquid cash flow.

Why do you need an Emergency Fund?

As our current global situation is so adeptly demonstrating, you can’t predict everything that is going to happen. Life has a series of twists and turns, and you simply don’t know what is coming up around the bend.

Your heating system might break down in the dead of winter, your company might file for bankruptcy, or a death could occur in your family. Do you have enough money set aside the handle these emergencies for a month, 3 months, or 6 months? If not, you need to start and regularly add to an emergency fund.

How much money should be in an Emergency Fund?

There is no hard and fast rule about how much money you should have in your emergency fund. First, you need to assess your current financial situation, and think about how much debt you are carrying. If you have any consumer debt (such as credit cards or lines of credit), you must strike a balance between clearing that debt, saving for your future, and building an emergency fund.

If you have consumer debt, you should work on building a starter emergency fund of at least £1000. Once you have this basic emergency fund set aside, you should then work hard at chipping away at your debt. Once you are out of consumer debt, you can get started on adding to your emergency fund until you have at least three to six months of household expenses in a savings account.

If you are in a stable career with a regular income, you are less likely to need to use your emergency fund. If you are in a two-income household and have been in a steady job for more than a few years, having a three-month emergency fund set aside is probably going to be sufficient.

However, if you are a solo earner, you work on commission, you’re self-employed, or you have other factors in your life that could lead to instability, you should instead focus on accumulating an emergency fund of at least six months. Illness, job loss, or other crises could lead to an inability to pay your bills, rent, and living expenses.

What kind of an account should I use for my Emergency Fund?

Your emergency fund should ideally strike a balance between offering high interest while still being liquid and easily accessible. You might need to access your money fast and easily, allowing you to pay a repairman or a vet bill without any hassle.

Try something like the easily accessible yet high interest account offered by Goldman Sachs. Their Marcus account has been designed to help you build a large cache of liquid savings with an interest rate that is higher than market rate.

On the other hand, you also need to be mindful that you aren’t saving your emergency fund is an account that is too easy to tap into when you want a nice meal out or a cheeky mini-break. Some people find that it is best to keep their emergency fund with a completely different bank than their other accounts, just to add an extra step to the process. That way, it’s still easy to get a hold of it when you need it, but it forces you to think carefully before you do.

When is it a good time to use my emergency fund?

We have listed some of the times it is necessary to use an emergency fund above – such as a burst water main, an ailing pet, or an unexpected loss of income. However, with some sudden expenses, it can be hard to know if it is the right time to withdraw money from this account.

When you feel like you might need to use your emergency fund, you should ask yourself the following three questions:

1. Is this expense truly unexpected?
2. Is this expense necessary and unavoidable?
3. Is this expense urgent and time sensitive?

If you can answer yes to these questions, you can use your emergency fund without hesitation. However, if you find yourself answering ‘no,’ or you have to really think about the answers, you might want to reconsider. Try to find another way to manage the situation so that you can maintain the integrity of your emergency fund.

A 3-step plan for building your Emergency Fund

We all have our own preferred ways to save money, and some of them are far more effective than others. Take the steps below and tweak them to suit your own personal style and needs.

1. Create a budget
Creating a budget can be done in countless different ways. But all of them require you to tally up your monthly expenses, and your income. Once you do this, you’ll know how much you can save each month. Try setting aside your savings first and treating them like they are a vital bill that must be paid every month. Remember, once you pay off your debt and can start socking away the money you were previously putting on your credit cards and loans, you will be amazed at how quickly your emergency fund adds up.
2. Determine your monthly savings goal
Some people like to set a daily, weekly, or monthly savings goal – but the most important factor is that you continue to add money to your emergency fund. If you stay dedicated to your goal and start adding any extra money you can, your emergency fund will grow quicker than you might think.
3. Add more to your savings as time goes by
As time passes, you might be able to start saving more and more. If you get a raise, you can add that percentage to your savings plan. You can also look for new ways to save money, such as using apps that round up your spending and deposit the money in a savings account. You can also sell your unneeded items on eBay, pick up a side hustle, or look for other ways to scrimp on your household expenditures.

Imagine what it would be like to have a financial buffer

Really take a moment to close your eyes and imagine a financial safety net there to help protect you in your time of need. A six-month emergency fund can help you to truly relax in the knowledge that you and your family will be taken care of in case of an emergency or unforeseen circumstance.

Think of your emergency fund as an insurance policy that you pay into on a monthly basis. Yes, it costs money and takes some planning, sacrifice, and patience, but it will pay off when you have no other options.

You can breathe a sigh of relief when your car breaks down, you lose a freelance client, or you have an unexpected illness that forces you to take time off work.

As the world struggles to deal with the calamity of COVID-19, can you truly put a price on the peace of mind and security an emergency fund could buy you?

Author's Bio: 

Kath is the founder of This Thing Called Money, a personal finance website that covers topics from your money mindset, managing money and making money. Whether you want to understand your relationship with money, start a side hustle or achieve financial freedom and retire early, she is determined to help you get the life you want.