New research from the Yorkshire Building Society has revealed that a huge number of Britons are alarmingly unprepared for financial trouble. Around 14 million Brits have less than £500 in savings, with more than 70% admitting to having less than £100 saved up.
Perhaps more worryingly, the number of Britons with no savings at all has nearly doubled since 2019. Though it can be difficult to save, especially during the turbulent times of the pandemic, it has never been more important.
Not only does an emergency fund provide a safety blanket for financial surprises, but it can also help to reduce stress levels and improve your mental wellbeing.
There’s a lot to worry about in life, so knowing that you’re prepared for a financial emergency can take a huge weight off your shoulders.
Continue reading to see what an emergency fund is and why it’s vital to have one.
An emergency fund gives you peace of mind when the unexpected happens
An emergency fund is a separate stash of money reserved for life’s many unexpected expenses. Unfortunately, there’s no easy way to predict the future and the costs it may bring with it.
You might feel like you’re prepared for anything but, if your savings aren’t quite up to scratch, you could find yourself in a difficult situation. From your boiler breaking down to a leaky roof, having an emergency fund could be vital for maintaining financial stability.
While the amount you need in your fund will depend on your specific circumstances, most experts suggest having around three to six months’ salary saved in a dedicated account.
The pandemic has demonstrated just how uncertain life can be. As many businesses struggled, perhaps your income suffered as a result, or you were forced to take an extended period of sick leave? Worse still, perhaps your household lost a source of income?
With so many Brits struggling financially, it can be difficult to build up the necessary savings to cover these costs. Here are a few ways that could help you bolster your emergency fund.
5 easy ways to boost your emergency fund
1. Understand your budget and be strict with it
Breaking down exactly what’s coming in and going out each month is vital. While a mortgage and some bills are typically fixed, essential expenses like food and travel can fluctuate. Being tough on yourself is the first step towards saving.
You could look to implement a budgeting method. One of the most popular of these is the 50/30/20 rule, which aims to guarantee a decent amount of saving per month. This method sets a limit on what percentage income you should be spending on different things.
Of your post-tax income, it suggests that you should spend:
- 50% on essentials, such as housing, food, and bills
- 30% on wants, such as dining out and personal treats
- 20% on savings contributions or paying off any debt.
If you don’t think the above method is quite for you, try researching other budgeting methods to find a better fit. There are plenty of suggestions to help you no matter your financial situation.
2. Pay yourself first
It could be beneficial to consider “paying yourself first”. In other words, contribute towards your savings immediately when you receive your earnings and spend what’s left over.
This way, you’re guaranteed to make meaningful contributions to your emergency fund and any other savings you have.
3. Keep your emergency fund in a separate account
By keeping your savings and spending money separate, you might find that you’re less likely to break step one and go over budget.
Keeping your fund in a separate account earmarked for emergencies means you’re less likely to dip into it for everyday expenses or even treats.
4. Cancel direct debits
Check your bank statement and read through all your direct debits from last month. Cancel the gym membership you haven’t used since lockdown began and stop giving your money to the magazine you’ve yet to read.
It could also be worth double checking any annual payments you may be making, as these are harder to catch on your statement. Over time, these savings can add up – it’s all money you can redirect to your rainy day fund.
5. Make sure you’re maximising the returns on your money
With interest rates at record lows, it can pay to shop around when it comes to saving.
Many accounts now pay a fraction of 1%. For example, the National Savings & Investments “Investment Account” account pays just 0.01% interest – that’s just £1 a year for every £10,000 saved.
To get the most from your emergency fund, make sure you regularly check that you’re getting a competitive return. Boosting your interest rate improves your returns which, over time, can compound into a significant sum.
If you haven’t maximised your ISA subscriptions for the year, keeping your emergency fund in a Cash ISA could be beneficial. Any interest you earn will be paid free of tax, and many Cash ISAs offer instant access to your funds when you need them.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The favourable tax treatment of ISAs may be subject to changes in legislation in the future.