A Good Life: Your Emergency Fund

A good life is whatever it means to you. The goal of this series is to help you define it and most importantly, build secure foundations to make it happen.

Kicking off with the finance fundamentals:

In this guide, we'll cover

✅ What an emergency fund is and why you need one

✅ How to evaluate how much you need

✅ How to pay yourself first

✅ What to do about debt and other saving ambitions

A note on using this guide:

🌱 When you see text in a box like this, it's a task

Sh*t happens. That's just life. If you've ever tried to stick to a spending plan, you'll also know that as human beings we're not great at predicting stuff. Ever tried to estimate the cost of a holiday and then worked out what it actually cost you? That's always a laugh. Life is expensive and emergencies happen.

What is an emergency fund?

Your emergency fund or f*** off fund is your number one. This is your ‘in emergency break glass’ financial SOS tool. Think: broken boiler, illness, the dog ate chocolate and needs an expensive vet visit. It's also sometimes called a f*** off fund because you can use it to escape middle-finger-worthy situations - terrible boss, toxic relationship etc.

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Old school advice

The old-school advice is that you should save 3-6 months' worth of living expenses.

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It kinda makes sense; If you lose your job then you'd have a decent amount of runway to see you through until you find another job, but for the average person, that's going to be between £4,500-£10,000. That's an amount that will probably take you a year or more to save.

Let's say you're an average earner on £31,461 (that was the average salary in 2020 according to the ONS).

You spend:

🏠 £700 on rent a month

🥕 £750 on groceries, bills, car insurance, maintenance costs etc.

🎉 £200 on holidays, eating out and fun stuff

After these costs, you can probably afford to save about £288 a month, at a push.

To save just a £3000 emergency fund is going to take you around 10 months.

New school wisdom

So yes, in an ideal world, we’d all have at least 3-6 months’ worth of living expenses stashed away. If you're on a high income, go for it.

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But a better question to ask yourself is this:

🌱 If the worst happened, how much would I need to get through it or solve the problem?

Situations you should explore include:

❇️ Redundancy

❇️ Illness

❇️ Home maintenance

❇️ Family emergency

❇️ Relationship breakdown

Think through those situations and then consider the following questions. If you're the pen and paper type, this table format might help.

A single person with no kids will have a very different answer to a family of 5.

To answer the 'how much' question, you'll want to look at your recent expenditure. What's your 'bare-bones' budget? i.e. how much could you live on comfortably enough, if push came to shove.

Some things to consider...

🔥 Risk profile

It's also important to factor in risk. A civil servant or a doctor will have a different risk profile for redundancy to someone who works in a more vulnerable sector.

🪂 Your parachutes

Also, you'll want to think about any other parachutes you can rely on:

🪂 Your non-financial back-ups - e.g family. Could you safely rely on a family member to support you?

🪂 Protection - Does your employer provide things like health insurance or critical illness cover

🌱 With all this in mind, you should be able to estimate roughly what you'd need in an emergency fund.

Should I pay off debt first?

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This is a controversial one. Don't @ me. I'm of the opinion that if you're paying silly-%-interest on a credit card then you should prioritise that. You could end up paying hundreds if not thousands more in interest by waiting to pay debt down. So long as you retain access to the credit card to cover you in case of an emergency, focus on putting as much of your income towards it as you can afford, and then start saving for your EF.

That being said, I know it can feel comforting to have some cash to fall back on and it's a good idea to have a bit of a buffer in your current account. If this feels better for you, spend a month or two building a mini-EF that feels right and then crack on with paying down your debt.

If it's 0% interest debt and it's the 0% rate isn't expiring any time soon then you could start to build your EF. It's SO important to keep an eye on when those rates expire and make sure you're planning ahead to pay it down on time. Remember to make your minimum payments.

How do I actually save for one?

So this is where you'll need to do some sums. The big question is:

🌱 What can I realistically afford to save every month?

If you're currently not able to save anything then it's time for an audit of your outgoings and spending plan (guide is coming soon). You might also want to look at auto-savers which offer round-up features like MoneyBox, Monzo and Chip.

Pay yourself first

The most important step is getting that EF money out of your current account ASAP. Your employer pays you but it's only when you've set that money aside that you've paid yourself. Think of your current account as money to be spent that 'current' month but you need to move money into your savings to be paying your future self. The psychological effect of prioritising your future self before anything else is a powerful one.

🌱 Decide on a savings account or pot. Set up a standing order or use an autosave feature on your banking app to make these savings happen without you even thinking about it.

A note on accounts

FYI - You want this pot or account to be accessible. Don't stash it away in a fixed interest, hard to access savings account. We're not interested in returns, just accessibility, and security.

Other savings

Now, a girls gotta live - maybe it's holidays, maybe it's a new Mac, maybe it's Charlotte Tilbury lipstick..but in addition to your EF savings, you might want to save into another 'pot' or account for the bigger, boujier, but non-essential purchases we all need to make.

And that's it. Your emergency fund is growing 🌱

Recap

To recap, we've covered:

✅ What an emergency fund is and why you need one

✅ How to evaluate how much you need

✅ How to pay yourself first

✅ What to do about debt and other saving ambitions

If you've got questions or need support

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