What is an Emergency Fund and How Much do I Need?

In the current economic climate, there are a lot of people worried about redundancies, their own businesses and how they are going to make ends meet if something happens. In my last blog, I considered financial protection and how that can help when things go wrong. However, sometimes, the emergency cannot be covered by financial protection. In the short term, one way of giving yourself some breathing space is to have an emergency fund. So, what is an emergency fund and how much do you need?

An emergency fund is exactly what it says, a pot of money for emergencies. It should be used for things like the boiler breaking down or the car needing a new part, or if your income stream suddenly stops. It isn’t there to pay for holidays, new clothes or treats! It is there to avoid the need to draw on investments or use credit cards when you have short term cash flow issues.

How much do I need?

Start by working out how much your monthly basic expenditure is. This should include your mortgage (if you have one), utility bills, phone, car, insurances, food and other transport costs. I can forward a budget planner to help with this. Drop me an email to tamsin@smartdivorce.co.uk and I will send it to you.

I would recommend having an emergency fund of at least six months of basic expenditure, i.e. If your basic expenditure is £3,000, you should have £18,000 as a minimum. If you feel more comfortable with more than this, such as 12 months, then you should keep that as your emergency fund. If you do need to spend any of it, don’t forget to top it back up.

Where should I keep it?

It is important to ensure that this fund is kept in cash and is accessible should you need it. Therefore, it shouldn’t be invested but should be held in a deposit account or with NS&I. I would suggest that a no notice account would be best. It might be possible to use a short-term fixed rate account, as long as access were available if you needed it.

I would recommend that this fund is kept separately to other savings. Set up an account just for this money. Savings for holidays or university funds for children or tax should be in different accounts. Whilst I wouldn’t suggest having dozens or accounts, it is sensible to have specific accounts for specific purposes.

Surplus above emergency fund

For monies over and above the emergency fund, which are not earmarked for other things, such as tax, holidays, etc, you should consult a financial planner. The most appropriate way to save or invest it will depend on you personally, your lifestyle, your age, your family, your hopes, dreams and fears. A financial planner will discuss this with you and work out where you should save your surplus monies.

If you need any help with this, please do not hesitate to contact me by email at tamsin@smartdivorce.co.uk or book an initial call at https://calendly.com/tamsin-caine/15min.