🚨 Emergency Funds - Why do you need one?
Hey friends 👋
Welcome to the first email from the Akash & Money newsletter!
I'm hoping to share a lot of useful information about personal finance in the future so I'm glad you are here. Today's topic is emergency funds and is inspired by Kae and one of her tweets.
I wanted to cover this as my first topic because 2020 has been pretty wild so far. Coronavirus has caused unemployment rates to skyrocket and with that the need for emergency funds as well.
Research found that one in five workers in the UK had no emergency funds before the coronavirus lockdown. Before the furlough scheme came into effect, this would have left a lot of people worrying about how they would pay for their essentials. For people already living paycheck to paycheck, the 80% paycheck offered simply was not enough and for others, they found themselves locked out from the furlough scheme completely.
These are perfect examples of why everyone needs an emergency fund!
What is an emergency fund?
An emergency fund is a separate stash of money for unexpected emergencies that may happen in life. Generally, it's a few months of expenses which include rent/mortgage payments, petrol/car payments, food and utility bills.
There’s a lot of things that can be classed as an emergency; the loss of a job, an unexpected bill or even a boiler repair in the winter.
The emergency fund doesn’t only have one name. In other places, it has also been called the 'F**k off' fund. Paulette Perhach wrote a post which explores two different situations, one without an emergency fund and another with one at hand. I think it is an article that is worth a read.
I also managed to find this video that summaries emergency funds in just a minute.
Why do you need one?
Having an emergency fund can be helpful in several ways. A lot of the time without an emergency fund, people tend to look into credit cards, overdrafts and loans to help them in difficult situations. It’s great having access to such options. However, they can end up costing more in the long term due to the fees associated with them.
Losing your only source of income can affect your financial life quite severely and sadly this was something that happened to a lot of people this year due to the ongoing pandemic. As mentioned above, a lot of people were able to get 80% of their salary via the furlough scheme in the UK with the remaining 20% being optionally provided by their employer. An emergency fund here could have been used to make up the difference instead if an employer did not provide this.
I found myself in a fortunate position where both my job and income were unaffected during the lockdown. At the moment I have about 6 months worth of expenses stored away for emergencies.
In the past, I've had to dip into my emergency fund three times and I've listed what I used the money for each time below.
Vet bill - £800
My dog ended up needing to visit the vet and receive emergency treatment. This is one of the largest bills I've had to pay out of pocket as I didn't have pet insurance at the time. My emergency fund was at hand to cover the costs of this bill.
24/7 locksmith - £150
Somehow I managed to lock myself (and my family) out the house with the keys still on the other side of the door late one night! After an hour of trying to unlock the door, I had to call a locksmith to drill a hole through the lock to get the door open and also have a new lock installed on the door.
Flight change fee - £100
Two years ago I woke up one morning to catch my flight to Tokyo. Unfortunately, I managed to forget my passport at home with less than an hour before the flight. I ended up needing to rebook my flight for the next day. As I’d booked through a travel agent, I only needed to pay £100 for a flight change and narrowly missed having to pay for a completely new ticket. At this point of my life, I didn’t have much of an emergency fund, but I'd often set money aside and end up dipping into this fund I had, which later became the foundation of my emergency fund.
In all of these situations, my emergency fund was available to cover these unexpected costs. Without this emergency fund, I would have likely turned to using my overdraft or a credit card for these purchases, with both of these options likely costing me more money.
How to start an emergency fund
If you haven't got one already, starting to save for an emergency fund can be daunting at first. There are a few things you can do that make the process a bit easier.
1. Start small & figure out how much you need per month
It's a good idea to look back and work out how much you spend each month to get a rough idea of how much you need per month. To start with it's best to aim for £1,000 as the starting point of your fund. Once you hit that goal, continue adding to your fund until you have several months of expenses put away. I've found having 6-9 months worth of expenses is generally a good amount to have in an emergency fund.
2. Put money aside right after you get paid
I treat saving for my emergency fund like a bill. I always have to pay into it first after getting paid. By putting this money away first, I’m less tempted to spend it and adopted an 'Out of sight, out of mind' mentality with it, which leads me to the next point.
3. Put your emergency fund in a separate account
I found that keeping this money in a separate place from my main savings has helped remind me not to dip into this fund apart from when I needed it. You can do this as well by using a separate savings account or using a bank that offers the ability to split your money into several pots/spaces without the use of multiple bank accounts.
4. Using savings apps & round-ups
Savings apps like Plum, Cleo and Tandem all make it a little easier to save money by putting away small amounts of money throughout the month. Some banks like Monzo & Starling Bank also offer the ability to round up your transactions and save the spare change from your card purchases.
5. Have a look at other resources!
There's a lot of great information out there on the internet! For example, on Twitter, Kae (@ikeeyah_) has a great thread on how to save money. YouTube channel, Two Cents have an amazing video on emergency funds, covering some scenarios of when an emergency fund was/would have been useful.
The finish line 🏁
If you made it this far, well done! There's just over 1,200 words here in total, so thanks for sticking around. If you haven’t already, you can follow Akash & Money on Twitter and Instagram.
I'll see you soon with the next issue of Akash & Money two weeks from now 👋
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