At the beginning of the month I set my goals for July 2018. One of the major targets I included was to set up my emergency fund. Those of you who have been a part of the #debtfreecommunity for a while will know exactly what I’m talking about. But for those who are new to the concept, what is an emergency fund?
What is an Emergency Fund?
Quite simply put, an emergency fund is a cash buffer. A pot of money that you set aside for a rainy day.
Whilst on your debt free mission, it’s natural to want to throw every single penny you have at your debt payments. You want the total to go down as quickly as possible! One hurdle we all face at some point however, is the appearance of unexpected payments. Unfortunately life waits for no one and no matter how careful we all are things pop up that we don’t plan for.
Before you get on your way with debt payment it is important to take some time to set aside some money for this very occasion. Dave Ramsay, author of The Total Money Makeover recommends that you save £1000, or £500 if you are on an incredibly tight budget or low income. (His book is an incredible financial guide and one that I will talk about in more depth at a later date.)
Whilst in the process of saving your emergency fund it is important that you still make all of your minimum payments to credit cards, loans and other forms of debt that you have. The sooner your fund is in place, the sooner you can give your debt your full focus. Once you’ve completed your emergency fund you can progress with debt payments knowing your safety net is in place.
What should I use it for?
That horrible morning when the boiler breaks down on the coldest day of winter. The dread of hearing your car give up on the way to work. An unexpected loss of income when have urgent payments to make. All of these fill me with panic when I look at an empty bank account and know anything could happen that I haven’t prepared for.
This is what an emergency fund is for. You will feel a huge sense of relief knowing that you have a pot of cash which is easy to access and can dig you out of that horrible situation immediately.
What should I NOT use it for?
Your emergency fund is NOT there for days when you’re a bit tight for cash. It should not be the go to when you have the January blues and fancy an “emergency” holiday and it is absolutely not to be dipped into for that quick coffee because “it’s fine, you’ll just pop the money back in when you get paid”.
This can be really hard to deal with in moments of weakness when your mates are off out for dinner and you hate missing out but it is so important to stick to your budget and keep your emergency fund for emergencies only. It will be tough but you will be so unbelievably grateful for the pot of money that saves you on a day when you really do need it.
Where should I keep it?
Your emergency fund should be liquid. In other words, it should be in a savings account or current account that is separate from your day to day spending money but still easy for you to access. There should be no penalties for withdrawals. It should be accessible immediately in case of, you’ve guessed it, an emergency.
What do I do if I have to use it?
Top it back up again. It is as simple as that. Once the emergency is dealt with, your emergency fund might be a few pounds down or it might be completely empty. Pause your debt payment and go back to minimum amounts temporarily. Then top your emergency fund back up to the £500 or £1000 that you originally had. Knowing how much it has saved you in an emergency will make it all the easier to fill up second time round!
Charlotte Musha has written a great in depth post about the emergency fund, baby step one, from Dave Ramsey’s perspective in this post.
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