Emergency Funds: How to start building yours now
Most of us have faced some sort of financial emergency in our lives which required us to dig into our savings or turn to payday loans. Some people plan and have money put to one side to sort out these unexpected emergencies. Wouldn’t It be great to know that you have a stash of money in your financial war chest to fight those pesky unforeseen expenses like having to pay to have the car repaired, or a household appliance replaced or pay the odd parking ticket? In this article we want to cover all of the ways in which over the course of a year how you too start to put money to one side without it affecting your day to day life so you won’t have to turn to even the best payday loans to get you out of a financial hole.
Why should I have an Emergency Fund?
Why should I have a separate emergency fund, why can’t I simply keep all my money in one bank account and take from there when I need to? Well, the simple answer is when you place the money into your emergency fund you know that the money is there to serve a purpose and that is it is only to be used to pay unexpected bills such as those mentioned above. It is not to pay the rent, mortgage or any of the other regular monthly outgoings.
When you need to take money out of the emergency fund you would feel it in the same way as taking money from your regular savings. From experience doing this feels almost like you are having your pocketed picked. Whereas when it comes from the financial “war chest” you know that it is serving its purpose. Although that does not mean you ought to surrender the money without a fight. Always fight for every penny on every bill before handing over any money.
How much money should I have in my emergency fund?
The emergency fund should in theory have at least enough money to see you and your family through 3 to 6 months of no income. If your monthly outgoings are £2,000 per month then you are looking at an emergency fund of no less than £6,000. Of course, if you are starting from zero emergency fund you will need to start to build up to this figure. Presuming no unexpected financial emergencies occur then this figure ought to achievable in a relatively short space of time.
Start planning today
The first step is to open a bank account into which you will deposit a fixed amount of your wages into. This only takes a few minutes and most of the time can be carried out on-line. The second thing to do is to determine how much you are going to put into your emergency fund each month. A good number would be £100 per month. This figure is to start with as over a few months of saving you will have the price of your average garage bill or cost of a new kitchen appliance like a fridge or washing machine.
Set up a standing order from your main bank account to deposit £100 into your emergency fund. The maximum you place into the fund is your discretion. When you open your emergency fund bank account, they will most probably send you a debit card. It is important that you put this card some place safe and not to carry it around with you. Keeping it at home will prevent any temptation when you are out and about to spend the money in the account.
You might want to put any extra cash you receive from work into this account. There will come a time in the future when you will have enough money in the account that you will not need to add to it any further. Once again this is your discretion. The ultimate goal is that you do not have to rely on payday loans in the future.
Building your Emergency Fund one expense at a time
As mentioned earlier in this article the ideal amount of money to have in your emergency fund is 3 to 6 months of living expenses. This will take time to build and won’t happen overnight. This process will take a few years but remember the purposes of doing this is so that you never have to dip into your savings account or your day to day living expenses account or take out a payday loan.
So, let’s see how you can start to put together the foundations of your war chest one expense at a time. And what you need to do is consider every household and personal expense you have under review. Which means, if it is not necessary then it is binned fast.
Expense 1: Reducing Mortgage Costs
Have you ever looked at your mortgage? This is single largest regular expense in our lives. It is worth considering taking this beast on board, if you are coming up to the end of your fixed term mortgage and it is up for renewal it will pay to shop around for the best deal.
You do not have to stay with the same mortgage provider out of any sense of loyalty or laziness. If you have equity in your property you can try to negotiate a better interest deal or consider taking out an off-set mortgage where you can offset your mortgage against your savings and pay less. An alternative is to consider interest only mortgage.
Of course, it will be cheaper than repayment, but your monthly repayments will be lower, just remember that you are not paying down the principle loan amount and will owe the balance at the end of the mortgage term. Interest only mortgages take some of the strain off your shoulders for a couple of years after which you can go back to repayment.
Expense 2: Reducing Rent Costs
Here you can reduce your rent costs by either moving to a smaller flat or to a cheaper area. We have covered this subject of reducing your rent costs here.
Expense 3: Make money from your property
If you have any spare rooms in your house or flat, you may want to consider hiring it out on platforms like Airbnb. This may not be to everyone’s liking but you only must do it for a short while as you start to build up your emergency fund.
Expense 4: Reduce your energy bills
How many times have you left a room and not turned off the light? Or left the T.V on when no one is watching it. Even leaving appliances on standby consumes electricity. Get into the habit of switching off any lights and appliances when not in use.
Consider purchasing energy saving light bulbs if possible and switch off laptops over night when not in use. If you charge your laptops at work, you might find that they will have enough charge for a few hours of home use.
When it comes to choosing the right supplier always plan ahead and a few weeks before changing to make sure you get the right deal. This can be difficult sometimes with the maze of tariffs available. This is where a smart meter comes in handy as it can tell you exactly how much you are spending and using each day.
Turn down the thermostat a couple of degrees and put on a jumper. Sure, this sounds a little drastic, but consider the reasons you are doing this. Would you rather the money stays in your pocket or goes to fund the luxury lifestyles of the CEOs of the energy company’s?
Consider also insulating your home correctly. This can be initially expensive but simple measures to insulate your own home can be found by doing some simple searches on YouTube. Even closing doors helps to retain heat in a room.
Expense 5: Shopping Bills
We in the UK love our takeaways. But pound for pound they are more expensive than preparing your own meals. Sure, 99.99999% of us do not have a pizza oven at home but spending £20 for a couple of takeaway pizzas is a bit much when what you are in effect eating is glorified cheese on toast with fancy ketchup.
First thing to go out of the window are the takeaways. There that’s at least £20 to into the emergency loan fund. If our target is only £100 per month, we are 20% there.
Start to consider the food which you purchase at the supermarket. Do you need to always buy premium brand products? Alternatively consider shopping at the budget supermarkets such as Aldi or Lidl. This can shave a huge amount off your shopping bills each month.
When you prepare your meals in the evening make a little extra that can be used for your lunch the next day. This will save you at least £3 per day in lunch. Over a month that’s about £60. So, with the takeaway embargo and making your own lunches you have £80 to go into the emergency loan fund. You see that it does not have to be that difficult.
When out shopping look for supermarket own brand non-food products such as cleaning products. Again, more money which can be saved.
Expense 6: Do You Need to Use the Car?
Do you need your car to take you everywhere? Could you walk instead? Even if you need to take the car try not driving all the way to your destination. When you drive to work could you park 500meters from the office? If you do this, you will save 1 km of driving each day. 20 km each month, well you get the idea. Petrol being what it is today every penny you save which does not end up in the pockets of the oil executives is a good thing right?
Public transport may be an option if you forgo the car completely as in sell it. Selling your car means no more insurance, road tax, repairs petrol and everything else which cars are prone to drain your bank of money. Public transport in the UK is not the cheapest but if you don’t have a car it might work out cheaper than maintaining a car.
The alternative is to get a bike and ride everywhere. Not only will you save money on petrol plus wear and tear on your car you have the added benefit of keeping fit.
If you downsize your car you could save money on road tax, fuel and insurance costs.
Petrol can often make up a sizeable part of your monthly budget so try to cut down on the use of your car. For shorter distances, why not use public transport, take your bike or go on foot?
Expense 7: Consider your wardrobe
Do you really need to buy clothes each month? Can you make do with the clothes which you already have? If you learn to sew you could take it upon your self to repair clothes. Alternatively, if you really need to buy clothes can you buy them from discount clothes stores. A pair of jeans is still a pair of jeans.
Buying clothes which can survive various changes in fashion such as normal shirts and trousers will mean you are not wasting money on trying to keep up with the latest styles and who says you should.
Expense 8: Going out on a budget
Everyone needs to let off steam once in a while and doing so without having to re-mortgage the house is becoming a rare event. Going down the pub now costs an arm and leg, eating out can be eye wateringly expensive. So why not entertain at home. Purchase some drinks from your local supermarket, break out the BBQ and have friends over. Ask them to bring a bottle and there you have it. No need to break the bank or end up with a huge credit card bill at the end of the month for no reason.
Instead of going to the cinema and paying their crazy prices to watch a film which no doubt will be disappointing why not have a cinema night at home. There are so many films available for free on YouTube, but you can also pay to watch films on YouTube too and at a fraction of the cost of sitting in a cinema.
Expense 9: Summer Holidays
Why do we think we have to holiday abroad each year? This phenomenon is quite recent. Many people if they were being completely honest would rather not have to endure the frankly hugely frustrating, annoying discomfort of shifting the entire family overseas for 2 weeks each year. This article written in the Evening Standard describes that the average family holiday sets us back around £4,800. That’s a big hunk of cheese. Why not just stay at home.
That’s right, just take two weeks off work stay at home and just relax. Enjoy the fact that you have £4,800 in the bank that Pedro, Manuel or Stavros is not going to get their mitts on. This amount of money in the emergency fund each year is enough to see you through the most turbulent times when you would otherwise have to turn to short-term loans instead.
Ok, fine don’t just lock yourself away for 2 solid weeks like a hermit. Find out what is happening in the local area. Take the time to go on day trips or two. Pack your own lunch and enjoy the British countryside and we do have some beautiful coastline of our own to enjoy. So, take one for the country and stay here.
Expense 10: Re-Examine your Personal Expenses
Look at how much you spend on yourself each month. Do you have gym membership? Do you really need it? Can you cut it out and replace it with finding alternative ways to keep fit such as going for long walks or exercising at home instead? How about your mobile phone contract, could you downsize your contract to a cheaper tariff? Remember every penny you save goes towards your emergency loan fund.
Another great way to save some money is asking the shops for free sample when buying toiletries. Also be aware of special offers, coupons and vouchers.
Expense 11: School Expenses
Sending your kids back to school is always an expensive time of year. School labour under the impression that parents have unlimited amounts of cash and will pass the burden to them from school uniform to covering books in protective plastic.
The best approach is to buy the school uniform components from discount clothes stores or ask friends or family for any clothes their children have outgrown.
Stationary is best to buy on-line rather than from the local stationary shop who will charge you a premium.
School trips unless they are mandatory are generally a waste of time and money. These are generally only put on so that the teachers can get a free holiday at the parent’s expense. If your child objects offer them 20% of the school trip in cash. Most kids will take the money.
Expense 12: Use Skype or Whatsapp
Never use the mobile or landline to contact friends or family. There are so many free communications apps that it is a wonder that British Telecom have not gone out of business.
Expense 13: Change Insurance Providers
When it comes to insurance providers it pays to make them beg for your business. Push them for every single penny when renewing. They know the cost of acquiring a new customer is more expensive than retaining an old one. When it comes around to renewing your insurance make them give you their best offer then throw that price at another insurance company, get their best price then go back to your original insurance company and have them match the best price. Why should they have an easy time of it.
Expense 14: Consolidating your debts
If you have outstanding credit card debt, personal loans, payday loans it might be an idea to get a debt consolidation loan to pay off all the smaller loans. This way you are paying less interest plus it is a lot easier to repay and manage one loan rather than lots of little loans.
Expense 15: Presents
This is an easy one. When it comes to presents keep it simple and only for children. Adults do not need presents and if you do give presents a small gift but backed up with your genuine friendship is worth more than a 2 week all expenses paid trip to the Maldives.
Building up your emergency loan fund should not be too difficult. Provided we have an objective in mind we can easily meet that challenge not to be caught out when those unexpected bills rear their heads and try to rob us of our hard-earned cash.
Once you get into the habit of having an emergency loan fund you will wonder how you managed without one.