Your security blanket
Time to read: 4 minutes
You’re never too old to have a security blanket, especially when it’s the financial kind. This stash of emergency cash is a real comforter. And when you’ve got one of your own, you’ll be so grateful every time it gets you through one of life’s sticky patches.
Do I need an emergency fund?
Yes, yes, a million times yes. According to the Money Advice Service, a staggering 40% of working-age people have no emergency fund, with less than £100 in savings available to them at any time.1
Imagine if something unexpected happened…
Could you cope with the financial shock of losing your job, your hours suddenly being cut or your business going under? Your security blanket acts like an extra few pay cheques to keep you afloat, ensuring you've some money ready and waiting for when life happens.
How much do I need to save?
You're aiming to save between 3 to 6 months' worth of living costs. This isn't the amount you would earn in that time, it's the amount you'd spend on regular bills. Things like: mortgage or rent, utility bills, groceries and TV subscriptions.
For example:
If you spend £750 month, aim to save up to £4,500
If you spend £1,000 month, aim to save up to £6,000
If you spend £2,000 month, aim to save up to £12,000
This should be enough of a cushion to keep everyday life ticking along while you get back on your feet if you lose your income. It could also give you financial breathing space to take care of unexpected big expenses, like a new gearbox or a boiler repair.
One thing to bear in mind. If you have credit cards or loans that are costing you more than you’d make in interest, it usually makes sense to pay them off first before you start saving.
How much should I put away each month?
If you're looking at the figures above and wincing, don't worry. Everyone's budget is different so only save what you can afford, even if it's a small amount every month. Although obviously, the more you can save the better.
Once you get into a savings routine, you'll be surprised how quickly it grows. If you put away the price of a takeaway coffee every day for example, you'd have over £1,000 in a year.
Where should I save my money?
When you've worked out how much money you can comfortably afford to save, you could set up a Direct Debit or standing order into a savings account. It doesn't matter whether you get paid weekly or monthly, just arrange for the money to be transferred the day after your wages go in.
Which leads us onto choosing the right sort of savings account. You're building a pot for emergencies only, so when you need it you'll want fast and penalty-free access to your money. This means:
- Look for easy-access accounts so you can get your hands on your money instantly
- Avoid notice accounts as you’ll have to wait to access the funds
- Avoid regular savings accounts as you’ll lose interest if you make a withdrawal
Before opening an emergency account, always check the withdrawal small print to avoid any nasty surprises down the line.
How much is too much?
If you’ve got more than 6 months’ expenses saved up, you might want to think about diverting future savings into other pots. Keep putting money in this easy-access account and you could be missing out on the chance to earn more elsewhere.
Now you’re in the regular savings habit, you can start working towards other short, medium and long-term goals. Depending on what you have in mind, there’s a whole range of savings and investment options that could help make your money work harder for you.
Having a security blanket is one of the pre-requisites to investing as it means you can afford to leave your money to grow. Yes, investing involves some risk as you may not get back what you put in. But it also gives your money greater earning potential. So now could be a good time to consider whether investing might be worth the risk.
For emergency use only!
Now your emergency pot is full, put a lid on it. Seriously. Put a mental lid on it, stick a few padlocks around it and picture it hidden in a very dark cupboard. Do whatever you need to do so you're not tempted to dip into it.
And if the little devil on your shoulder starts whispering; "you deserve a holiday", ignore it. That cupboard door is locked. It won't be a very comforting security blanket if you start picking holes in it.
1Source: The Money Advice Service, Savings Evidence Review (PDF), 2017
