Everyone has had an unexpected bill to pay at some point.
Life just happens – and usually at the most inconvenient times. It’s a depressing statistic but millions of households in the UK are just one paycheque away from being unable to pay their bills.
What if you had money set aside for life’s surprise costs? What if could build up a fund every month so that an unexpected expense didn’t become a life-changing disaster?
If 2020 has taught us anything, it’s that – quite literally – anything can happen. Whilst no-one could have predicted the situation we’re in right now (and no-one can control it), there are steps that everyone can take to help with financial uncertainty. If you can put a plan in place that makes money one less thing to have to worry about in an emergency, then that’s a positive step!
An emergency fund is where you set money aside to cover large, unforeseen expenses that life sometimes throws your way. This could be anything from losing your job to repairing your car or replacing something major at home (tip: it’s always the washing machine).
Having an emergency fund acts as a financial buffer that stops you getting into debt in order to pay unexpected bills. If you’re already finding it tricky to balance your bank account, getting into more debt to cover an emergency situation isn’t usually a good idea. For people who don’t have that buffer in place, that’s often the reality of the situation; it can get out of control fast.
In an emergency, you’re also less likely to be aware of all of your options (or have time to research them). This can again have a negative impact on your finances (not to mention stress levels) as you have a short amount of time to pull together a quick fix rather than the most sensible option. It’s one of the reasons why many people turn to high-interest payday loans to try and get them out of a sticky situation, even though they’re often a poor choice for many.
The exact amount really will vary from person to person. Take a long hard look at everything you’re spending, use the opportunity to really think about your budget and take stock of what your outgoings are.
A good rule of thumb is to look at your monthly expenses and aim to have enough stashed away to cover 3-6 months’ worth of bills and expenses. You’re probably now doing some mental arithmetic and thinking “that sounds like a lot…” And you’re right, it is a lot for most people – that’s why it’s so important that you’re financially prepared. It’s also the reason why you should get started building your emergency fund sooner rather than later. Work out how much you can spare each month, and how long you’ll need to save to reach your goal.
You’ll also want to be realistic with your monthly savings targets. If you decide to save more than you can afford each month, you’ll quickly get disheartened and it could actually be bad for your finances.
It’s also worth noting that if you have existing debt (such as credit cards, an overdraft etc) you need to be putting steps in place to get these repaid and it’s important to include these in your budgeting plans.
The whole point of an emergency fund is that it’s easy to access in an emergency. That doesn’t mean stashing notes under your mattress (please, don’t do that) or carrying your emergency fund in cash on you at all times (definitely don’t do that).
What it does mean is putting your savings in an easy access account that you can dip into at short notice if you need to. The benefits of this vs the (terrible) mattress idea are that most UK banks protect savings up to £85,000 in the event of something going wrong, it reduces the risk of having lots of cash around and that you can set up automatic standing orders to ping the money into your savings.
Having said that, the main issue with putting your emergency fund into something like a cash ISA is that your money will be losing value every year due to inflation – this means you could lose 2% of your savings every year. That’s why it may be worth splitting your emergency fund into two: one where you can access the cash immediately, and another where your money is growing every year and beating inflation.
Where could that be? You guessed it: gold. We believe owning real gold bullion is one of the best ways to keep your money safe, beat inflation and have easy access to your money – with Minted, you can sell your gold and get your money back in a few days.
Whether you put your money into a cash ISA or a gold savings account, it helps to keep it separate from your day-to-day bank account and transactions. That’s because it’ll also stop you from accidentally hitting up your emergency fund for non-emergencies. Without sounding like your mum: online shopping, hitting the pub or going on holiday doesn’t equal an emergency.
By treating your emergency fund like another fixed cost, you’ll make it harder to skip it and think “I’ll start next month”. You can set up the standing order for the minimum amount it’ll take to reach your goal, and then if you can afford to save more – great! Set it up to come out on the day you get paid so you’re not tempted to spend it immediately.
There are lots of different savings tips and tricks you can use to top up your regular amount too. You can participate in savings challenges, start using old-school penny jars and spend hours scouring money-saving websites. Saving smaller, regular amounts is usually more successful than saving a big chunk in one go.
After a couple of months, take a look at your savings and circumstances. Were you realistic with your goals? Could you save a little more each month and reach your goals a bit quicker? Has anything happened during that time that changes your circumstances? Think about things like a new job, increased rental costs or any life changes that are coming up. If you need to adjust your goals or savings amounts, then do it!
Once you have a comfortable level of emergency savings, you can also start contributing immediately to a gold savings plan through Minted. With just £30, you can hold and own your own gold, and with the new Minted dashboard coming you’ll also be able to earn rewards, gift gold to friends and participate in gold rankings!
Building your emergency fund won’t be the sexiest financial step you’ll ever make, and it’s likely you may never need it. But the day your car breaks down or you need to buy an urgent flight to take care of someone, you’ll be incredibly glad to have it. Building up an emergency fund is one of the first steps you can take towards financial health, future planning and getting out of a cycle of debt that many people exist in.