Everything you need to know about emergency savings
You never know what life is going to throw at you and what unexpected costs might arise. Having an emergency fund savings account means you’ll be able to deal with things like a broken car or a lost mobile phone. It’s best to split your savings, keeping some aside for long-term savings goals and then having a separate fund for emergencies.
Why it’s important to have an emergency fund
Research from Experian shows that half of UK households under the age of 35 are unable to afford an unexpected bill of just £250. A 2018 ING survey also said that 29.5% of UK households have no savings. If these people were to lose their job, they might not be able to cover the costs, forcing them to turn to bad credit, incur overdraft fees or use payday loans. An emergency fund would mean people wouldn’t have to turn to these negative means of covering the cost of living.
If something smaller but still consequential like your boiler breaking and you didn’t have the money to fall back on, what would you do? Access to Wagestream would mean you could get the wages you’ve already earned for a fee of £1.75. So instead of turning to bad credit to cover the cost, get your employer to get Wagestream instead.
How to build up an emergency fund 🏗️
Like you would save for a wedding or a car, you need to work out how much to set aside to have a substantial emergency fund. A good rule of thumb is to have 3 months essential outgoings available instantly. If you spend £1,000 a month on rent, bills, food, travel costs, and other things you can’t live without, you should aim for £3,000 in your emergency fund.
Like with all savings, it’s important to keep to what you can afford. Saving small amounts and often is more effective than saving larger amounts every now and again. Saving regularly enables you to get into positive habits and stops you from overcommitting too much money.
Where should you keep your emergency fund?
When you’re deciding where to keep your savings, take a look at these different options:
- High-yield savings accounts
High-yield accounts may carry fewer fees than regular savings accounts and they also tend to offer a higher annual percentage yield (APY) on deposits.
- Money market accounts
Unlike regular saving accounts, money market savings accounts may come with a debit card, check-writing privileges or both, depending on where you bank. This type of account is very valuable if you need to make an emergency purchase or write a check to cover an unanticipated expense.
- Certificate of deposit
Instead of being able to dip into your savings up to six times a month, certificates of deposit or CDs requires you to commit to leaving your savings alone for a set period of time. This can range from 30 days to 10 years, depending on the CD term you choose.
There are lots of different emergency fund savings accounts and finding the right one for you might take a bit of shopping around. But, any of these options are much better than just sticking it under the mattress, so you’re already off to a good start. 🛏️
What to do before you start saving for an emergency fund
Before you start saving in an emergency fund it would be cheaper to pay off any existing debt first. If you have credit card debt, unauthorised overdrafts, pay-day loans or arrears on your mortgage repayments make sure you pay these off first before you look at an emergency fund saving account.
Good luck setting up your emergency fund or rainy day account, let us know how you get on.