How to build an Emergency Fund

In this uncertain economic climate having a decent pot of money set aside for emergencies can provide real security and peace of mind. You can use an emergency fund for unexpected expenses and if you loose your job.

I aim to have around 3 months of expenses in my emergency fund, but how much you decide will depend on your individual circumstances. E.g. if you have a stable and secure job then 3 months is acceptable, less stable I would aim for 6+ months.

An emergency fund is vital if you want to achieve financial freedom, the following article will provide you with a range of ways to build and maintain your emergency pot of money.

Segregate your funds

It’s really important to keep your funds in separate purpose driven accounts. I use my current account for day to day use and two other savings accounts, one for short term savings and the other as my emergency fund.

I highly recommend keeping your funds separated so that you are not tempted to dip into it which over time would deplete your funds. You can even hold your emergency fund with a different bank to your other accounts to increase the effort to access the funds.

You need to develop the mindset that different accounts are for different things. Your emergency fund needs to be for emergencies only! If you can do this you will build and protect your fund from impulse spending.

Review your spending habits

This is where your budget will step in to help you. Especially if you are still building your emergency fund, you need to review your spending habits in order to increase your ability to save money fast.

You need to cut down on non-essential spending which means eating out less and doing free activities instead of spending money to socialize. All the money that you would have spent should be instead saved into your emergency fund.

Once you have saved your goal amount you can then review your budget again to reallocate the money you were saving into different goals.

Pause all investing

Only invest money that you will not need for a very long time. I invest with the view that I will not be able to access those funds for at least 5 years.

With that in mind, should you have an unexpected expense and you don’t have the money in your account the last thing you want to be doing is try to release your investment funds. This can take a lot of time and even cost you early withdrawal charges.

Therefore, I would only invest money after I have an emergency fund that I feel offers adequate cushion. Any money that you were investing should be saved in your emergency fund.

Do a savings challenge

Sometimes just setting a goal is not enough mental motivation, but if you set yourself a structured challenge then you turn saving into a game. We all want to win at games.

There are loads of saving challenges out there, pick one that is appropriate to your circumstances. Examples of two that I like are the £1 a day challenge and 52 week challenge.

Saving doesn’t need to be dry or boring. If you introduce the element of fun into money management you will reduce stress and motivate yourself more. The amount you save will quickly grow.

Use price comparison sites for your household bills

You could save yourself £100s in a year by switching energy supplier or getting quotes on your car or home insurance.

Energy and insurance companies do not typically reward customer loyalty, they tend to put up prices, or move your onto default tariffs which are always more expensive, on your renewal date.

If you keep track of when you need to renew your insurance make sure you shop around as you could find a quote that is cheaper than your current provider. You could put the money you save towards your emergency fund.

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