Do you have money set aside for a “rainy day”? With responsibilities and financial commitments it is a good idea to have some money set aside for emergencies. But how much should be set aside?
Firstly, we should consider what is an ’emergency’. For me, I would include any of the following:
- Loss of income for either yourself or your partner if there are financial dependencies. If there are two incomes then the chances of being laid off at the same time are smaller
- Health-related issues for yourself or family, which may well be linked with loss of income.
- Repairs around the home, e.g. broken roof tiles, broken fences, burst pipes, etc.
- Replacements for essential possessions that are absolutely necessary, e.g. a car, oven, washing machine, etc.
My father-in-law had always instilled in to my husband that an emergency fund should cover you for three to six months in case of loss of income.
A simple way to work that out is to look at an average month and add up all the regular outgoings. For example, mortgage/rent, utility bills, loans, credit cards, food, travel and entertainment expenses, etc. Add them all up, and then multiply it by three. That’s how much at a minimum your emergency fund should be.
This could well be a pretty large number. So what are your options? The best way is to open an easy access savings account and make a plan to start saving for it. Even if it will take a while to reach it, figure out how much you can afford to put away into it on a regular basis and set up a standing order into the account. If you happen to have any additional surplus one month, make an additional deposit. Even though you have easy access, the key thing is to treat it like a long term savings plan that you shouldn’t dip into.
However, what if don’t quite have enough saved up when you do need the money, what are your options then? If it’s to cover you in the short to medium term, a credit card might be a good option here particularly if it’s a small sum. Some will also offer a 0% introductory interest-free period on purchases for new customers so is definitely worth checking out.
Do you have an emergency fund? How are you sourcing it and how much are you aiming to keep in there? What would you class as an emergency?
Disclosure: This is a collaboration post.