Smart Ways to Build an Emergency Fund

The average UK adult would not last more than a month without a pay check! This is why I am sharing some smart ways to build an emergency fund because when you have an emergency fund, you protect yourself from getting into debt. I read this report that stated, ‘the average amount of gross savings in the UK is £79,296 per household..but 25% of households have less than £1,800 saved. The gross savings included financial assets like ISAs etc and somehow this does not surprise me at all because we are a consumer-focused country but also some don’t make enough to even cover basic costs so saving is challenging.

For those who an interested in learning smart ways to build an emergency fund on any income then read up as I share the 4 tips that I followed even when I was on a low income. First, we need a refresher to remember what an emergency fund is and what it is not. An emergency fund is money you save for more than a rainy debt, it’s money you save for future emergencies that possibly your pay check might not be able to cover. An emergency fund is not a ‘dip into every month’ account because you want it and it is so important to understand what qualifies as an emergency and what doesn’t – car breakdown (YES), holiday (NO).

Smart Ways to Build an Emergency Fund

Like most people, I have always saved a bit of money on the side for rainy days, it wasn’t anything extravagant but I knew that if one emergency came up I could cover it without need to live off my credit card. But I also knew that I would only be able to cover one emergency and not more especially since I was on a low income but thankfully my expenses were pretty low too. As my expenses started to increase, mortgage, insurances, car, utilities and many more, it made sense for me to look at ensuring I had at least the basic necessities saved up incase I did not have an income for at least 3-month.

Building an emergency fund does not need to be completed and in this post I am sharing some simple but smart ways to build an emergency fund on any income. First things first, you need to have a budget, it is so important to know how much money you have coming in, how much money is going out and then dive down into looking at your income and expenditures, how much can you afford to save every week or monthly. Hiding your head under the sand will not help you, you need to know where your money is going and how much of it you can keep in your pockets and not spend it frivolously.

The steps below are very easy to implement but you first need to get your budget sorted and it will make it easier to know how much you can afford to save monthly and what type of emergency fund you should build up.

Noodle Budget

In the financial world there is something called the ‘noodle budget’, this essentially means, your budget of your absolute (x2) minimum that you need to survive on. So, things like streaming services (Netflix) can go, if its cheaper to commute than drive then you get rid of the car and insurance, reduce your food budget to basic necessities and remove all miscellaneous or fun spending. The noodle budget is your skeleton budget with just the absolute basics that you require to survive. Once you know what that amount is then multiple it by 3 (months) or by 6 (months), if you are a single person with 1 source of income I recommend saving for six months of expenses.

Automate Savings

Only when you know how much you should save for to reach a target of 3-6 months worth of basic necessities can you start to work out how much you should save monthly. Budgeting is so important because it is a great tool that you can use to support your personal financial management. Knowing how much income you receive and where it’s being spent can help you determine how much you can afford to save. When you know this then you can proceed with automating your savings and by this I mean set-up a standing order (direct debit) to exit your salary account every month and be moved to your chosen savings account.

Keep Emergency Fund in Accessible Account

Choosing where to keep your emergency fund is so important, people often speak about keeping your money somewhere accessible and by this they mean somewhere you can easily get to in an emergency. I don’t recommend investing your emergency fund money, this is a mistake in my opinion because whilst the stock market can make you money it can also lose you money. You need liquid money to pay for emergencies when they arise and with investment accounts, for most you can not accessible the funds immediately and may need to wait a few days. There are some financial people who will tell you that keeping money in a savings account is a mistake as you are losing to inflation and it’s not making you money. Whilst this is true that is not the reason we save for an emergency fund, it is not meant to be grown (if it does that’s great but that’s not the purpose), it is meant to be ready to be used when there is an emergency.

So, if your car just broke down today, what will you use to pay for it? Credit card? Get a loan? If you have am emergency fund all set up then I suggest you use it as this stops you from going into debt. This is one of the many reasons why it is so important to have a stash of cash kept for life emergencies that always seem to spring up when you lease expect. Do you have an emergency fund?