We all know the dreaded feeling of a sudden financial emergency, and it is inevitable that sooner or later you’ll be tested again with expenses you didn’t see coming.
Whether it is a faulty car or a problem with the house, we’ve all been there with the frustrating helplessness of the situation.
However, while you can’t predict or avoid these scenarios, you can plan how you’ll react to these unexpected expenses.
It’s sensible to keep at least three months’ worth of regular expenses in an account you can access quickly in case of an emergency. A quickly accessible account could be a Savings Account or cash ISA you can withdraw from at any time without penalties.
Why keep three months’ worth of expenses in an emergency fund? One of the biggest financial emergencies you could face is losing your job. How would you pay the bills without an income? It could take a couple of months to find a new role, so by having a three-month emergency fund in place you at least have a buffer between yourself and the wolf at the door.
By having an emergency fund put aside, you can try to avoid using debt during hard times. Debt undoes the good work of investments, with interest often trapping you for extended periods of time. It turns an unexpected short-term expense into a longer term drain on your wealth. Don’t allow that to happen, build your emergency fund to prepare for the unexpected.
As well as avoiding using debt, you also want to avoid having to dip into long-term savings or investments to cover unexpected costs. You are quite literally taking away from your future if you do this.
Building up three months’ worth of emergency expenses could be the solution and can be achieved through sensible budgeting. Put some money aside each month until you have enough saved. It doesn’t matter if it takes you a while, once you get there you will have strengthened your financial position.
Our recent Savings Gap research highlighted the need for greater awareness around emergency funds. We found the average UK consumer takes a £900 hit every year due to unexpected bills, but only half of Brits have enough saved to cover these expenses.
The study shows that one in two consumers dip into their long-term savings to cover these costs; denting their efforts to save for major life events such as retirement or a first home.
More worryingly, 17% of consumers turn to short-term loans to cover these bills, putting them at risk of falling into unmanageable debt. A fifth rely on family and friends to lend them the money – thus creating more personal debt and hindering others’ efforts to save for the future.
Do more with your money by having an emergency fund of three months’ worth of expenses in place, leaving your investments safely in place to grow towards a brighter future.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. Please be aware that this communication should not be considered as financial advice.
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