Emergency Fund

"Why is the emergency fund important? Why can't I just jump straight into investing and make loads of money?"

It's understandable to have these questions as it is not exciting to talk about saving and getting an emergency fund set up.

But this part of your financial toolkit isn't about following the frantic nature of the stock market, equities or more exotic speculative punts and getting caught up in that.

Be Emergency Ready

This is about building a stable, secure platform so that you can handle setbacks in case of, you guessed it, an emergency!

The last thing you want to be doing is selling your stocks and investments to fix a broken boiler or car or any other unforeseen expenditure.

Generally, investments are meant to be held long term. Some say at least 5 years but setting your sights on 10 years and beyond for investment is probably a better bet if you're able to. These should also be in a separate account to your emergency fund.

Emergency funds, on the other hand, are ideally held in easily accessible cash savings accounts so you can tap into it as and when needed.

How Much Is Enough?

This is a really subjective question and getting to your "enough" value is something you will have to calculate. Remember, we need to be good with numbers here.

The key part of this is to work out your monthly costs, which can be broken down into regular (same amount each month) and non-regular (amount differs each month) outgoings:

• Regular - utility bills, mortgage or rent, car repayments, subscriptions, personal loans, phone etc.

• Non-Regular - food shop, entertainment, petrol or transport, gifts, meals out etc.

Have a look back over the last 3 months (the further back you go, the better) and calculate your average outgoings for the month. This is your average monthly spend.

To get a target amount for your emergency fund, the popular time frame to use is between 3 and 6 months. So take your average monthly spend and multiply by 3 or 6 and you get your answer.

Start Small

Don't be disheartened if the figure you calculate looks overwhelming to begin with. It is but a mere approximation and something to aim for.

However, a good trick is to break that amount down into smaller chunks that you can attack with vigour and cross off as you go along. For example:

• 6 months is the end goal but a big number so get to 1 month in savings first.

• If 1 month is still a big number then divide by 4 to get a weekly amount first and build from there.

Build The Pot

A good first target to hit may be £100 just to get the momentum going and then you can attack the next target, say £200 and go up in increments until you get to that target amount.

You should aim to build this cash pot in a savings account that pays interest so that you can get to the target quicker as the interest rate works in your favour.

As time and contribution goes on, the more you will get in interest and soon enough, you will get to that target amount.

After An Emergency?

What happens if you have an emergency that requires an expenditure?

Well, firstly, we hope that it all turns out ok but any money that you have put aside into your emergency fund can be readily accessed and should cover you if you have built it up to 3-6 months.

Once the emergency is over (hopefully), then the prudent thing to do would be to pause contributions to investments and focus on rebuilding the pot to the required amount.

How Else Can I Protect Against Emergencies?

The emergency fund is there to give you support in times of need but it has its limits, mainly being the amount available!

This is where various insurance and protection cover comes in so you may want to check out the other section on the website to learn more about the various cover that's out there.