Not everyone has the same financial goals in life. This is fine. But we will always face financial decisions, big and small. Making financial decisions with minimal preparation, will be overwhelming and stressful, which can lead to solutions that don’t benefit you. In this post I am focussing on the importance of an emergency fund, and why I think we all should consider having one as an adult for life. You don’t have to do them the same as me, but it can be food for thought. And you can tailor your finances to prioritise what you want.
[canva edited for emergency fund]
This is the first of a few posts expanding on financial decisions to consider, and my examples/experiences with them. Also, I’ll share the accounts that I use and manage, and provide areas to further enhance your research. I am not a financial advisor though, I am reading up on these topics just like you.
Financial decision #1: Consider the unexpected
I said in my previous post, “an emergency can be anything”. It’s there for the unexpected expenses. The purpose of an emergency fund is to reduce the pain of spending money on something you have to spend on. Sometimes when you purchase something, it might cross your mind on whether it’s a necessary purchase. In the event of an emergency, that thought doesn’t come through because it’s a high priority purchase. What you get is the sense of dread of “Oh snap, how can I afford that?”, “Where is the money coming from?”. The emergency fund comes in that situation. I have seen people go through that, and I fell for the traps myself. So, when I started working, I set up my emergency fund.
I currently put away £300 per month into my emergency accounts. Yes, plural. One is my main account and the other is for my car. I believe cars are very high maintenance. If they didn’t bring me any convenience and public transport in my area was reliable, then I wouldn’t have one. But that’s not the case.
When I used my emergency fund?
After the easter break, I set off from my parents and no more than 30 seconds had passed, and I felt a weird jolt. I freaked out and thought some kind of suspension or spring had broken. It didn’t help that I had a 100-mile journey ahead of me, so I turned back. My breakdown provider sent an engineer, and I was not happy at the idea of forking out a lot of money for the repair. Fortunately, it was a giant screw that somehow punctured my tyre.
[picture of screw in wheel]
Thankfully this required a small resolution, but this was a week from pay day. The way I budget, is that within a week of being paid, all my money is in its assorted places. So, I had no cash leftover, and required my emergency fund. The process was less than £80 overall, but that’s not an amount of money I had planned to spend that month. Because I had an emergency fund, it wasn’t too painful to spend, and it was necessary since I needed to go home.
What to consider with an emergency fund?
It’s normally advised to have about 3-6 months’ worth of expenses, as an emergency fund. The idea is that, if your income disappears for a short period of time, then you have a backup. This money is put in a high yield saving account (HYSA), which allows your money to gain (a high) interest, whilst sitting there.
I have my “main” emergency fund, and then a “car” emergency fund. The car fund covers all car expenses, including my yearly insurance, MOT and service. My main is for unexpected expenses, that are not car related. This does mean I don’t put aside as much as I could be, because I am sharing that money between 2 accounts; but this works for me.
How to get started with this financial decision
Do some research. There are plenty of bank accounts that offer a reasonable amount of interest. It’s not often that they beat inflation, but some money is better than none. I started off looking at Money saving expert who is based in the UK. Another way is doing it manually by searching on google.
Google: Main emergency fund with RCI bank. Currently at 3.8% I can withdraw from the account any time, and it takes a 24 hours for the cash to come through. It is an online bank, so I have to transfer the money to my debit account, to then withdraw cash or spend it.
Money saving expert: Car account, I use Chase bank. At 3.5% interest it also has a debit account, and does seriously fast bank transfers. However, due to the ease, it makes it more tempting to access the money. Also, Chase has a lot of other benefits, such as 5 % interest on round-up change, and 1% cashback on all spending for 3-12 months*.
Both accounts have standing orders to reduce the friction of me “accidently spending” the money before I save it. And this allows me to live within my means, whilst still saving. Pay yourself first, is advice that I take seriously when it comes to my savings.
*This depends on their promotions which vary.
Additional context
The reason I see cars as high maintenance enough to have a separate emergency fund, is because my first car proved me right. I saved about £600 my first year of working and was saving up to buy a new car anyways (because it was an old car). My car decided to call it quits 11 months after I started that account. It had earned about £60 in interest overall. Obviously that amount of money as not enough to buy a reliable car, especially since I had just moved house the month before. However, this money I had saved, meant I could take a smaller loan with a lower fixed interest rate, to get my new car. Any amount of money saved is better than none.
Moral of my story:
- Emergency fund is for non-deferrable purchase – If you can ask yourself if its necessary to spend now, it’s not an emergency in my opinion.
- Having some money saved is better than none – Even if its only a small amount, when an expense comes, that little deduction thanks to what you saved, will soften the blow, even just a little.
- Hold this money in a high yield savings account – It will gain interest on the balance, without you doing anything, and right now (June 2023) interest rates are doing really well (note the do vary regularly.
- You can have many high yield savings accounts – They don’t affect your credit score, however, the more you have then the less you can put in (unless you earn a lot of money). So it will take longer to reach a savings goal
- 3 – 6 months of expenses is a good ballpark goal – You can do more, and I wouldn’t recommend less. This gives you options.
- Pay yourself first – Put your money into your savings accounts before you do other monthly spends. This means you have a better understanding of what money you have left to spend on non-essential things.
