Did you know you have a 250,000,000/1 chance of dying from a falling coconut? Or, if you are left handed, you have a 4,400,000/1 of being killed using a right-handed product?
Yes, ok, these incidents are highly, highly unlikely. But the chances of everyday emergencies affecting you are worth considering...
For example:
- On average Brits spend £509 each year covering unexpected costs (British Gas, 2022)
- Almost 2.5m people in the UK are currently on long term sick leave
- Around 11% of children are disabled, rising to 23% of working age adults and 45% of adults over State Pension age
The key message? Life is unpredictable, and unexpected expenses can arise at any time.
In this article, we’ll delve into the factors that influence the ideal amount for your emergency fund and why having one is essential.
What's in this blog?
Having an emergency pot is essential
An emergency fund should be a non-negotiable line item on your monthly budget. The current economic factors are tough, but that’s exactly why it is needed. An emergency fund is a pot of money set aside just in case things go wrong. If you have money set aside for emergencies, you’re far less likely to experience financial difficulties or have to borrow at a high interest rate if things go wrong or your circumstances change. Knowing you’ve got some money tucked away might help you sleep better at night too.
How much should you be saving?
The question that often arises is, “How much should I save into an emergency pot?” If you’re asking yourself the same question, here are 5 things to consider when devising your emergency fund plan.
1. Assess your monthly expenses
The first step in determining the size of your emergency fund is to assess your monthly expenses. Create a comprehensive list that includes rent or mortgage payments, utilities, groceries, insurance, transportation, and any other regular bills. Add up these expenses to understand your basic living costs.
2. Calculate 3-6 months’ worth of living expenses
Financial experts commonly recommend saving three to six months’ worth of living expenses in your emergency fund. This range provides a safety net that can cover your essential costs in case of job loss, unexpected medical expenses, or other emergencies. If your job is less stable or you have dependents, aiming for six months’ worth of expenses may provide additional peace of mind.
3. Consider your job stability and income
Your job stability plays a crucial role in determining the size of your emergency fund. If your job is less secure or if you work in an industry with frequent redundancies, leaning towards the higher end of the three to six months’ guideline is advisable. Additionally, consider the stability of your income – those with irregular income may need a larger emergency fund to cover fluctuations.
4. Evaluate your lifestyle and dependents
The size of your emergency fund should also take into account your lifestyle and dependents. If you have a family or dependents relying on your income, it’s wise to err on the side of caution and aim for a larger emergency fund. Consider the potential expenses that may arise for your family, such as medical bills or unexpected home repairs.
5. Consider insurance as another option
Buying insurance involves you paying a regular fee to ensure you’ll get compensated if an unexpected event occurs. Insurance can be an alternative way to protect yourself and your loved ones. Find out more about the types of insurance you can get here.
Key takeaways
- Building and maintaining an emergency fund is essential for financial stability and peace of mind
- Experts recommend you save 3-6 months of your salary or regular income
- You’ll need to think about your specific circumstances to work out if you need more or less than this amount
- Consider if insurance could be another option to protect yourself
This content is for information purposes only. You should not construe any such information or other material as legal, tax, investment, financial or other advice. Any figures or references made were accurate at the time of publishing, and we cannot guarantee they remain correct after this date. We often link to other websites, but we aren’t responsible for their content.
