According to a recent article by Money Age, 46% of retirees wouldn’t have enough money to deal with an emergency should one arise.
The article reveals that, of the 10,030 adults questioned, 21% thought they had plenty set aside for emergencies when actually they did not. If this includes you, one reason could be that you’re not sure how big your financial safety net should be and, as a result, have not put enough aside.
That said, the issue of not having a large enough emergency fund is not the reserve of retirees. It’s an issue that impacts all ages, and if you’re younger and employed you could be at risk of not being able to meet your financial obligations if you had an accident and couldn’t work.
Read on to discover why building an emergency fund is so important, how best to do it, and how much you should typically have in it.
1. An emergency fund is your rainy day money
As the Covid pandemic highlighted, you never know what tomorrow might hold. Not having a financial safety net when the unexpected happens could cause major financial headaches.
If you have an emergency fund, it could help you deal with an unexpected, and unwanted, financial surprise. This could be major work needing to be done on your house or your vehicle, or having to cover your monthly outgoings if you’re unable to work.
Always have your emergency fund in an account that’s easily accessible so that you can use it straight away if necessary.
2. It avoids having to rely on expensive credit cards
While you may fall back on your credit card in an emergency, this could prove to be an expensive option.
Using a credit card and then paying the debt off over a period of time will typically result in a high interest charge, which may increase the cost significantly. According to a recent article by Forbes, the average annual percentage rate (APR) charged on a credit card is around 21% (variable).
While 0% offers exist, these typically revert to the average rate once the offer ends.
Another alternative could be a loan. Care should always be taken in thinking you can rely on this, as there is no guaranteed a lender will approve your application. This could be especially true if you need money to cover expenses as you can’t work.
3. Typically, you need a minimum of three months’ expenditure
A financial professional will typically explain that you should have between 3 to 6 months worth of expenditure in your emergency fund, including food and vehicle expenses. That said, you may decide you want to hold more money in your fund.
If you do, be careful not to have too much money in it, as inflation and historically low interest rates could reduce the value of your safety net in real terms. A financial planner will be able to help you determine how much money you should have in your fund.
4. Don’t be tempted to dip into it
Only use your fund for real emergencies. While it may be tempting to dip into it if you’ve not had to use it for an extended period, try not to. Using it to buy a holiday could cost you dear if you then are faced with an unexpected bill you have to put on your credit card.
One way you could ensure this doesn’t happen is to create a list of events you would use your emergency fund for. That creates a contract with yourself that could help stop you dipping into it.
5. An emergency fund provides peace of mind
Knowing you have the money to cover an unexpected event means you have peace of mind, and more able to deal with life’s financial curve balls. Covid taught us you never know what tomorrow may hold, and having money put aside means you’re in a much more financially robust position.
In short, an emergency fund gives you a financial buffer that could help you ride out a storm.
Get in touch
Speaking to a financial planner can help you understand how much you might want to have in your emergency fund, and how best to build it. They will also help you understand if there are other factors you need to consider, such as paying off debts.
If you do have debts, you may still want to consider building an emergency fund to ensure you don’t then fall back into debt should the unexpected happen. This is something a financial planner can help clarify for you.
If you would like to discuss your emergency fund, or your wealth more generally, please email hello@ardentuk.com or call us on 01904 655 330.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
