How long could you survive if you stopped earning money tomorrow? It’s a question that most financial advisers ask their clients pretty early in their relationship and the answers are often surprising. Most advisers reckon that people should have an emergency fund that equates to three months’ income, although some would increase this to six months.
It’s important to have money in the bank in case of emergency. Redundancy, illness or the breakdown or a relationship can cause a sudden drop in, or loss of, income but the bills still need to be paid and if there is nothing in the bank we end up resorting to borrowing money.
The stress of dealing with illness or redundancy or a relationship breakdown can be bad enough without having to deal with a bunch of bills that you can’t pay as well.
Of course many of us find it difficult to make ends meet even when we are earning money and so putting together an emergency fund is not easy. But it is important and so what you should try to do is find a little bit of slack in your budget and transfer a small amount to a savings account every month. Don’t wait until the end of the month to ‘see what I’ve got left’.
Instead look carefully at your budget, figure out how much you can afford to save every month, and transfer this amount to your savings account as soon as you get paid. That way you know that it will actually happen.
And since this fund is for emergencies make sure that you keep it in an account that you can access quickly. Look for the best interest rate that you can find by checking out comparison sites.
If you have a credit card that allows 50 days or so before you have to pay interest then you might be able to find an account that pays a higher rate of interest for one months’ notice. That way you can use your credit card for purchases and pay it off in full at the end of every month from your savings account.