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Last Updated on March 16th, 2023 at 04:01 pm

Unexpected emergencies can happen all the time. This can lead to urgent costs that were not anticipated for such as medical bills, dental fees, house or car repairs or funeral costs. It is therefore essential to consider creating an emergency savings pot to help tide you over during difficult financial times.

According to Investopedia.com, it is advisable to save at least 3 months worth of salary in your emergency fund. However, depending on your expenditure, debts and income level, the amount can vary based on how much you save each month.

This guide will explain how planning for the unexpected will stand you in good stead if a financial crisis arises.

 

emergency-fund

 

What Is An Emergency Fund?

 

An emergency fund is essentially money set aside to help you if an unexpected event happens to occur that requires financial input. The reserved money can then be used to help cover any urgent costs whilst preventing you from going into debt.

An emergency fund offers a form of protection that can help you get back on your feet quicker when faced with a crisis. It also offers a way of saving money which can help you to achieve financial freedom in the long run. Whilst there is also the option of taking out insurance to cover different types of emergencies, it is still worth taking extra precautionary measures if you are in the financial position to do so.

 

How Much Should I Save In An Emergency Fund?

 

It is generally recommended to save the equivalent of at least 3 months of your salary is an emergency pot. However, it is sensible to do some budgeting to work out what the right amount to save is for you. 

Calculate your living expenses to gauge how much you spend on your mortgage or rent, utility bills, car expenses, food bills, subscriptions or anything else of particular importance to you. Making sure you have enough money saved to cover these costs for 3 months, or ideally even longer, would certainly be helpful. 

Whilst doing the exercise, it is also worth considering easy ways to save money on household bills, food shops, fuel and more. Being money savvy in all respects will only serve as an advantage to you.

 

What Should I Use An Emergency Fund For?

 

Emergency funds should only be spent on actual financial emergencies. Examples of unforeseen costs include unexpected:

 

  • Medical bills
  • Dental fees
  • Pet costs
  • Job loss
  • Salary decrease
  • Funeral costs
  • House repairs
  • Automobile fixes

 

house-repairs

 

What Is The Importance Of An Emergency Fund?

 

Planning an emergency fund is extremely sensible to help reduce the negative impact that unplanned expenses can bring to your finances. Examples include:

Jeopardizing Your Ability To Pay For Monthly Essentials

If you spend most of your monthly income on living costs, then you could find that a big lump sum towards an unexpected bill would leave you unable to pay your regular bills or mean that you are left without money for important expenses such as groceries or pharmaceuticals. 

 

Paying Unnecessary Interest Charges

Whilst it can be seen as a commitment sacrificing a portion of your income each month, in the long run it can save you money. Rather than having to take out a loan or use a credit card whereby you would have to pay interest, holding onto a rainy day fund can stop you from building up debt. Using a loan or credit card to pay for these expenses could mean that a one off emergency expense grows into a significantly larger bill than in the first place. 

 

Pulling Money From Long-Term Savings

Those without an emergency fund may need to take money out of their long-term savings plan. For instance, you may have to sacrifice the hard work you have done in building a retirement fund or investment pot if an unexpected cost arises.

 

Borrowing Money From Family Or Friends

If you are desperate, you may need to turn to relatives or close friends. Not only can this put the other person under financial pressure given the short notice of the request, it can also become awkward if you are unable to pay them back within an agreed time frame.

 

How Can I Set Up An Emergency Fund?

 

If you are looking to get started, then there are a few considerations to help get you on the right track. Firstly, you should work out where you would like to set up the emergency fund, and decide which savings account you will use or if you need to create a new account. 

Then you should come up with a strategy to decide how much money you will deposit into the account and how often, for instance every 2 weeks or every month. It is worth setting up an automatic payment system so that you will not have to worry about forgetting to add the money each time.

So now that you know what to do, why not set up an emergency fund today? You will certainly be relieved that you have done this if an unexpected event arises.

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Justine Gray

Justine Gray is a contributor to Pheabs, sharing more than 10 years of experience in the consumer finance industry across the US. Follow her guides for financial advice, money saving tips and more. Follow them on Linkedin and Youtube.