Plan for the Unexpected
Covid-19 is an extreme example, but unexpected emergencies happen all the time. We never know when a family member might fall ill, when the fridge is going to break down or when that unexpected redundancy will hit us.
Planning for the unexpected is not just sensible, but critical if you want to be in a position to prevent, or at least reduce, the negative impact that unplanned expenses can have on your finances.
“Expect the unexpected” – Bear Bryant
Although we can’t see into the future, we can prepare and have a plan to cover unforeseen expenses. Insurance products are designed to help us with major emergencies. Life cover, health cover, buildings and contents insurance, car insurance, gadget insurance and many other types of insurances all exist for this reason.
An emergency fund works in a very similar way – but with a difference…
So, what is an emergency fund? An emergency fund is money you put aside to cover unexpected expenses – the small, or large, emergencies that we all face from time to time such as unplanned home repairs, automobile breakdowns, or even a loss of, or decrease in, your income.
Setting up an emergency fund is an essential way to protect yourself, and it’s one of the first steps you can take on your road to financial freedom. By putting money aside – even a small amount – you’ll be able to get back on your feet quicker when these unexpected expenses arrive. And you’ll be able to get back on track towards reaching your larger savings goals.
The Importance of an Emergency Fund
Without an emergency fund, when an unexpected expense occurs, you will very likely need to do at least one – but possibly more than one – of the following:
Take the extra money from your monthly income. However, many households, find that their income is already stretched, so doing this could leave you unable to pay other bills and expenses such as food, petrol, etc.
Use money that you had set aside for paying off your debts. If you’ve worked hard to save up enough to pay off your credit cards, loans, or your mortgage, an unforeseen expense could wipe out your savings.
Pull money from other savings. If you don’t have an emergency fund, you may have to take money from long-term savings like retirement funds or other investment pots that you have. For example, you might be saving for a car or house in a cash ISA, however, if you need £2,000 or £5,000 at short notice, you may have to dip into your ISA to get the money.
Rely on credit cards or loans. Borrowing to cover emergencies will set you back by putting you even further into debt. This would be detrimental for a family’s long-term financial plan.
Borrow money from family or friends. No one likes to borrow money if they don’t have to, many feel this is the only option when money is needed at short notice. The negative side of this, however, is that even if that ‘nice’ family member is happy to help, if you don’t pay them back within the agreed timeframe, things could go very sour.
“If you fail to plan, you are planning to fail”
– Benjamin Franklin
Set up your Emergency Fund
There’s no time like the present, so why not get your emergency fund started?
Here are a few considerations to help you get on the right track:
How Much? Decide how much you want to have in your emergency fund. It’s generally recommended that you have at least 3 months’ worth of living expenses in an emergency fund. For example, if your total monthly outgoings – including rent or mortgage payments – are £2,000, you should aim to have at least £6,000 set aside. However, any amount will be helpful and the more you can save, the better.
Set a Goal – Work out how long it is going to take you to save the desired amount. Set a target date and set milestones along the way. Reward yourself when you’ve achieved certain amounts.
Where Will You Save? Decide where you are going to save your emergency fund: Which savings account will you use? Do you need to set up a new account?
Saving Strategy – Decide how often you will save money in this account ie. every week, every month. Set it up so that your funds are regularly transferred into your emergency fund automatically. Then you’ll never need to worry about forgetting to save.
Whatever you do, get started on that emergency fund today. You will be glad you did when the unexpected happens!
And if you would like to have more funds to save, why not consider earning extra money by taking on more hours at work, getting a part-time job or considering our Genistar business opportunity.