The importance of an emergency fund – What is one and why do you need it?
Recent research, published in MoneyAge, suggests that almost half of UK retirees have insufficient funds put aside to cover emergencies. Arguably more worrying is the fact that 21% of those surveyed believed they had a large enough rainy day fund, but didn’t!
The suddenness with which our lives can change was highlighted by the outbreak of the coronavirus pandemic. An emergency fund can provide financial stability and improve emotional wellbeing should the worst happen.
But how much should you keep in your emergency fund? Where should you store the funds? And what benefits does it have?
Keep reading to find out.
How much do I need in my emergency fund, and where should I keep it?
How much do I need?
A rainy day fund needs to cover you and your family should you be unable to work, whether through sudden redundancy, accident, or illness.
If you are the main breadwinner in your family, your emergency fund may need to cover the majority of household expenses. It could be the difference between maintaining – or failing to maintain – rent or mortgage payments and keeping a roof over your family’s head.
For this reason, we would always recommend having at least three to six months’ worth of household expenditure in your emergency fund. Hopefully, this will give you time to get back on your feet or back into employment.
Where should I hold the funds?
The unexpected nature of an emergency means that your fund will need to be easily and quickly accessible.
An easy-access cash account could be the best place for your fund but remember that currently, with savings rates low and inflation high, money held with your bank could be losing value in real terms. As the cost of living rises and your monthly household expenditure increases, you’ll need to ensure your fund remains fit for purpose.
Alternatively, consider an instant access Cash ISA or similar product and shop around for the best rate.
3 benefits of having an emergency fund
There are several benefits to having an easily accessible emergency fund on hand. Here are just three of them:
1. You’ll know your family are looked after
If your household bills are mainly covered by your income, a stop to that income, or a sudden additional expense, could jeopardise your ability to keep up with payments.
Rent and mortgage payments, energy bills, or the cost of a child’s education, could all be covered by your emergency fund, ensuring your family remains looked after.
2. You can focus on getting back on your feet
Whatever the cause of your financial emergency – from a job loss to a broken boiler or a sudden illness – you won’t want to expend energy worrying about your finances.
The breathing space created by an emergency fund will allow you to concentrate on looking for a new job, finding the best deal on a new boiler, or getting well again.
3. Peace of mind
By putting an emergency fund in place, you are increasing your family’s financial resilience.
Knowing that you can ride out a financial shock will give you peace of mind, allowing you to enjoy the present without worrying about an unknown future.
There are other ways to protect yourself and your family
An emergency fund is just one way to ensure your family is financially protected. You should also consider protection policies that can provide regular or one-off payments in certain circumstances. Consider:
Income protection will provide regular payments equal to a set percentage of your usual income, helping you cover household bills while out of work.
Payments will continue until you can work again, and you will normally be able to claim more than once under the same policy.
Critical illness cover
Critical illness cover will normally pay out a one-off lump sum if you are diagnosed with certain conditions set out in the policy.
The plan will only pay out once but could help towards the cost of treatment or home adaptations, for example.
There are distinct types of life cover available, some paying out only on death within a set term, while others will pay out on death at any time.
Different types of cover have different costs attached so it’s worth thinking about the debt and dependents you have, as well as any cover you already have in place. Speak to us if you are unsure about the best way to cover these debts and look after your family in the event of your death.
Get in touch
If you would like help budgeting with your household income to build an emergency fund, or you’d like to discuss any other form of financial protection, get in touch. Please email us at email@example.com or check with your adviser.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.