An emergency fund is an amount of money specifically to help deal with those unforeseen situations. Your hometown bank can help you set up a suitable savings account to start an emergency fund – but how much should you aim to have in it? We help answer that question and give you some tips on managing and growing your emergency savings.
How Much Should be in Your Emergency Fund?
There’s really no hard and fast rule around this. Different households with different lifestyles will be susceptible to different types of emergencies. These could range from the family car breaking down to an unexpected period of unemployment.
Your emergency fund shouldn’t be a part of your regular savings or a “nest egg”. It needs to be in a separate account, ideally, to avoid it getting used up for anything other than emergencies. Make sure the savings account is instantly accessible without fees – consult your local community bank for advice on this.
As a guideline, try and aim for emergency savings account holding funds equivalent to six months’ household expenses. This is achievable by planning your budget to put a small amount away each month.
5 Tips to Grow Your Emergency Fund
1. Carefully budget to see what you can afford each month
Having a written or digital budget with all your incomings and outgoings listed helps you understand how much you can save.
2. Don’t set unrealistic goals
Savings goals can inspire you to try and put plenty aside each month, but if you save too much, you’ll just end up dipping into it as you run out of money to deal with your monthly expenses. Set a goal that’s sustainable, even if it takes longer to hit your goals.
3. Use automated payments
Talk to your bank about setting up an automatic payment on the day you get paid. This will circumvent the risk of you forgetting to top up your emergency fund. You’ll get so used to that money going out on payday that you won’t ever miss it.
4. Don’t use your fund to pay bills
It’s tempting to use your emergency fund to pay the power or credit card bills, so you have extra spending money that month. Doing this depletes your fund and makes it take so much longer to hit your savings goal.
5. Stop saving once you reach your goal
Once you hit your predetermined amount, you can either enjoy having more disposable cash each month or add it to a different savings account.
Emergency funds can prevent you from having to rely on credit cards or loans when disasters occur. As of October 2021, 340 million people in America have personal debt. Avoid increasing your debt by following our tips to keep your emergency savings healthy.