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M<\/span>uch as we love investing at Monevator<\/em>, even we believe saving for an emergency fund comes first. Building a cash stash to bubble wrap you against life\u2019s bad breaks is probably the most important financial move you can make \u2013 after clearing bad debt<\/a>, of course.<\/p>\n Stuff happens, as they say in polite company, and that\u2019s the starting point for why you need an emergency fund.<\/span><\/p>\n When you\u2019ve got a job and good health and <\/span>your income exceeds your outgoings<\/span>, setting cash aside might not even occur to you.<\/span><\/p>\n But without savings, you\u2019re walking a tightrope. The smallest shove can send you into the abyss.<\/span><\/p>\n You might not be hit by one of the life-changing shocks that kicks people on to the streets. But there are plenty of smaller things that can go wrong:<\/span><\/p>\n A sudden divorce, job loss, illness, or a lurch into debt can push any of us into a downward spiral.\u00a0 But ha<\/span>ving a good emergency fund on standby helps ensure that you never enter that parallel universe.\u00a0<\/span><\/p>\n At the very least, you\u2019ll feel better just knowing your rainy day savings are there.\u00a0<\/span><\/p>\n Save at least three to six months\u2019 income<\/b>.<\/span><\/p>\n Having this amount on hand is a good starting point. It\u2019s not a magic number but a balance of considerations.<\/span><\/p>\n Obviously, there\u2019s no limit on how much you could save for a rainy day. You could argue that a plumper cash cushion is best. Indeed, why not save to cover one year or even two?<\/span><\/p>\n Your personal situation matters here.<\/span><\/p>\n If you\u2019re a single self-employed pigeon fancier, you might want to retain a few months\u2019 more expenses than a couple with full-time roles at long-established companies.<\/span><\/p>\n By all means tailor your fund to match your circumstances. But be realistic about how quickly you can save your disaster-dodging dollop.<\/span><\/p>\n Set a stratospheric target, and you\u2019ll be directing all of your spare cash into the Emergency Fund, rather than somewhere that does<\/span> you more good long-term. (Think paying off a mortgage<\/a>, or investing in higher growth assets.)<\/span><\/p>\n Cut your cloth It\u2019s better to think about your emergency fund in terms of your monthly after-tax income rather than an arbitrary and set amount of cash.\u00a0<\/span><\/p>\n A \u00a310,000 emergency fund is obviously superior to having \u00a31,000 in emergency savings, but it\u2019s your monthly burn rate that counts. If the bare essentials cost your family \u00a35,000 a month then even a \u00a310,000 emergency fund won\u2019t last long.\u00a0<\/span><\/p>\n So first, think about how much money you\u2019d need to pay the bills for a month if you cut back on all the non-essentials you can do without in a crisis.\u00a0<\/span><\/p>\n A budget planner<\/span><\/a> can really help with this step.\u00a0<\/span><\/p>\n Now imagine you\u2019re out of work for several months because of unemployment during a deep recession, or due to an unfortunate illness.\u00a0<\/span><\/p>\n Six months\u2019 income (after tax) should get you through that kind of scrape unless you\u2019re really unlucky.\u00a0<\/span><\/p>\n In theory, six months\u2019 worth of net income in your emergency fund will last longer than six months on an emergency budget. That\u2019s because your income normally pays for life\u2019s little luxuries, too.\u00a0<\/span><\/p>\n But that extra wiggle room may be a lifesaver if things go from bad to worse.<\/span><\/p>\n Say, for example, your car conks out just before a big job interview. <\/span>With enough in your emergency fund, you\u2019ll be able to afford an immediate replacement in the nick of time.<\/p>\n If money is very tight, then save three months\u2019 worth of essential expenses (as opposed to net income). That is the bare minimum you should aim to hold in your emergency fund.\u00a0<\/span><\/p>\n Keep your savings in instant access cash<\/span><\/strong><\/p>\n Do not be tempted to invest your emergency fund, seeking a better return.\u00a0<\/span><\/p>\n There\u2019s absolutely no point running the risk that your emergency savings are halved in value \u2013 just when you need them most \u2013 by a stock market slump<\/a>.\u00a0\u00a0<\/span><\/p>\n Remember that stock market falls are correlated with recessions.\u00a0<\/span><\/p>\n Covering a period of unemployment is a prime use-case for an emergency fund. That\u2019s more likely to happen when the economy as a whole is in recession \u2013 also usually the worst time to be in equities.\u00a0<\/span><\/p>\n Limit your ambitions for your emergency money to earning the best interest rate<\/strong> you can from an easily accessible accounts.\u00a0<\/span><\/p>\n Broadly speaking, there are three kinds of emergency you could face:<\/p>\n In the first scenario, it doesn\u2019t matter much where your savings are located. As long as you\u2019ve gone for safe and accessible banks or building societies \u2013 that is, you\u2019ve not locked your money away somehow \u2013 then you should have no problem getting your cash when you need it.<\/p>\n In the other two scenarios however, the whereabouts of your money is everything.<\/p>\n If you put your emergency fund into an unusually high-paying savings account with a slightly sketchy niche provider, you\u2019ll obviously regret it if they go bust \u2013 but also if you\u2019re \u2018only\u2019 unable to access your money for a time.<\/p>\n This isn\u2019t a far-fetched possibility \u2013 there\u2019s a decent chance that your own emergency and trouble at a niche bank could coincide. Think Great Financial Crisis 2.0, where a recession sees you lose your job even as it threatens smaller lenders. (Read up on the Icesave drama<\/a> for a taste from the last go around\u2026)<\/p>\n One practical response is to stash your emergency cash with two providers with different Financial Services Compensation Scheme<\/a> (FSCS) licences.<\/p>\n This way you\u2019re covered for losses of up to \u00a3120,000 per account. And even if one provider goes bust, you can access your money at the other whilst you wait for your compensation to come through.<\/p>\n From a debanking perspective, though, there\u2019s a further wrinkle to consider.<\/p>\n Lloyds Bank, Halifax, and Scottish Widows do have separate FSCS licences, for instance \u2013 but they are all part of Lloyds Banking Group.<\/p>\n Put your money with any two of these institutions and you\u2019ll be covered from an FSCS perspective, thanks to the individual licences. But if Lloyds Banking Group decides to de-bank you, then it might conceivably lock up all your money \u2013 your current accounts, savings accounts, and investment accounts \u2013 at the same time.<\/p>\n A belt-and-braces way to avoid this? Stash your emergency fund cash across multiple instant access accounts \u2013 split across different FSCS licences and not under the same corporate umbrella.<\/p>\n Principles in practice<\/span><\/strong><\/p>\n I\u2019ve distributed my own emergency money across three seperate accounts:<\/p>\n It\u2019s up to you how complex you want to make things. But if anything nasty ever hits the fan, you could be grateful you took such precautions in advance.<\/p>\n Ideally, your rainy day savings should be kept entirely separate from the money you\u2019re putting towards a car, a holiday, or your dream of owning a parrot.<\/span><\/p>\n Of course if you\u2019re a disciplined sort, you could lump it all together and vow that the first <\/span>\u00a310,000, <\/span>say, is untouchable.\u00a0<\/span><\/p>\n But very few of us are saints. So unless you\u2019re expecting to get your halo in the post, k<\/strong><\/span>eep your emergency fund<\/strong> <\/span>separate from your other savings<\/a><\/b>.\u00a0<\/span><\/p>\n Spotted a delightful new fridge freezer that you simply must have when out shopping?<\/span><\/p>\n Come across a bargain holiday?<\/span><\/p>\n Those are not emergencies.<\/span><\/p>\n Many people \u2013 especially younger folk<\/a> \u2013 are unused to having cash savings. Hence as soon as they\u2019ve saved any money they\u2019re tempted to spend it. It\u2019s even harder if your partner has a different mindset to you.<\/span><\/p>\n So decide what is \u2014 or what isn\u2019t \u2014 an emergency at the outset. <\/span><\/p>\n You might even want to write down your definition. At least that could avoid the arguments later. <\/span>Then start saving for anything else after<\/i> you\u2019ve built up your fund.<\/span><\/p>\n We offered some suggestions for valid emergencies near the top of this article.<\/p>\n The money you saved when you first graduated from college won\u2019t be sufficient when you\u2019ve got two kids, a spouse, and a house.\u00a0<\/span><\/p>\n Make sure you review your fund at least annually. Expenses, liabilities, and inflation all creep up at least as fast as salaries rise. Top-up as appropriate.<\/span><\/p>\n It goes without saying that should pay back any cash you withdraw ASAP, once the emergency has been dealt with.<\/span><\/p>\n Don\u2019t mistake emergency savings for financial invincibility<\/b>. <\/span><\/p>\n Big hits to your property, income, or health can dwarf your emergency fund.<\/span><\/p>\n The best protection is a mix of cash buffer zone for smaller mishaps, plus insurance that covers you and your family from catastrophic loss to life, limb, and property.<\/span><\/p>\n Check out our useful articles on making the best use of insurance<\/span><\/a>.\u00a0<\/span><\/p>\n Bear in mind that insurance companies can take a while to pay out, or even fail to do so. Yet another instance in which an emergency fund can be a lifesaver.\u00a0<\/span><\/p>\n A lifestyle that habitually requires you to dip in and out of debt is the type most likely to get derailed by a cash call.<\/span><\/p>\n If you bought your kitchen on credit, there\u2019s a strong chance that you\u2019ll try to fend off any unexpected outgoings with your credit card or a personal loan.<\/span><\/p>\n But what if your particular emergency is a cut in your income? Increasing debt payments in the face of a falling income is about the worst thing you can do<\/b>. Short of selling a kidney.<\/span><\/p>\n Avoid this at all costs, by saving cash in advance and shunning debt. Even if your salary is secure, increasing debt payments will leave you more vulnerable <\/b>when fate deals you a blow.<\/span><\/p>\n Companies go bust due to cashflow struggles. Debt is often the multi-tentacled monster that drags them under. P<\/span>eople are the same.<\/span><\/p>\n Get out of debt<\/span><\/a>, and then start saving into your emergency fund.<\/span><\/p>\n The final reason you should build up your emergency cash reserves is because it will give you the security to (separately!) invest in the stock market \u2013 and ultimately enable you to meet unexpected expenses without liquidating your equities when they\u2019re down.\u00a0<\/span><\/p>\n With a sufficiently big emergency fund in place, you\u2019ll find it easier to <\/span>develop the lofty <\/b><\/span>disdain<\/strong> necessary for long-term investing.<\/span><\/p>\n Marie Antoinette offering cake from within her palace walls when the rioters are at the gates should be your role model when investing. Not Corporal Jones in the BBC classic Dad\u2019s Army<\/em>, panicking at the first hint of trouble.\u00a0<\/span><\/p>\n Cash on hand gives you that security. With an emergency fund saved to cover your unforeseen expenses, you needn\u2019t worry when the stock market wobbles.\u00a0<\/span><\/p>\n Need a last nudge to build up an emergency fund? Here you go: it gives you the bug to save and invest much more<\/b>.<\/span><\/p>\n That\u2019s certainly what happened to The Investor<\/em>.<\/span><\/a><\/span><\/p>\n And I\u2019m confident that if you\u2019re a saving virgin, then you too will get a buzz from seeing your net worth steadily going up instead of down.<\/span><\/p>\n Before you know it you\u2019ll be wondering how to start investing<\/span><\/a>!<\/span><\/p>\n<\/p><\/div>\nWhy you must have an emergency fund<\/span><\/h2>\n
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<\/span><\/li>\n<\/ul>\nHow much emergency fund should I have?<\/span><\/h2>\n
<\/b><\/span><\/p>\nWhere to keep your emergency fund (UK)<\/span><\/h2>\n
The type of emergency matters<\/span><\/h3>\n
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Location, location, location<\/h4>\n
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Lead us not in temptation<\/span><\/h4>\n
When to use your emergency fund<\/span><\/h2>\n
Review your emergency fund regularly<\/span><\/h2>\n
Think about insurance for some emergencies\u00a0<\/span><\/h2>\n
Emergency fund UK: <\/span>don\u2019t use debt!<\/span><\/h2>\n
Emergency money gives you confidence<\/span><\/h2>\n
Start with an emergency fund<\/span><\/h2>\n