In this guide, we'll mostly talk about building an ‘emergency fund’. But we’ll also show you how you can apply this to creating a ‘sunny day fund’ too, for the more joyous moments in life.
An emergency fund is a savings pot that you can use for unexpected expenses and emergencies. It could be situations like losing your job, or needing to fund home or car repairs.
A good rule to go by is aiming to save enough to cover three to six months’ worth of essential living expenses. This might include your mortgage, rent, utility bills, food shopping and essential travel funds. You could work out your average essential monthly spend, then multiply this by three to work out your minimum savings goal for your emergency fund.
Having an idea of what you're aiming to save will keep the goal in your mind and help keep you on track.
Once you’ve figured out how much you want to save in your emergency fund, decide how much you can afford to put aside frequently. You could make regular payments into your emergency fund to help build the habit. For example, you could choose to pay into it weekly or monthly. You might also want to set up a standing order to automatically pay the money into your emergency fund. This means you do not need to remember to do it, and it can take away the temptation to spend it.
If your situation changes, you might need to dip into the emergency fund you’ve started to build. But that’s its whole purpose. Just make sure you top it back up when you can and keep adding to it.
The concept of a ‘sunny day’ fund is similar to the emergency fund. Work out what you want to save for, whether it be a holiday, days out with friends and family, or just in case anything unexpected comes up – the choice is yours.
Then, you can follow the same steps on ‘how to build an emergency fund’ but with the goal to save for more moments of joy.
Zara, a 32 year old NHS worker, was hit with an unexpected boiler repair in her home. She did not have any savings set aside in an emergency fund, so was forced to take out a high-interest personal loan to cover the cost. This put her into debt and she knew she would struggle to pay it back because of the high interest rate. She was only just getting by and usually spent any leftover income she did have on treats or days out with friends. She felt stressed about the debt constantly, but felt there was no other option.
Zara realised she could have saved for unexpected things like this. She did some research and opened a new savings account specifically for her emergency fund, to remove the temptation to dip into it. Whilst it left her vulnerable in an emergency this time, she learned the importance of savings for financial security. She now sets aside some money each month to fall back on if she needs it.
Kieran, a self-employed 43 year old, faced a loss of income when he lost one of his biggest clients and at the same time faced a hefty car repair bill. He could not believe the timing.
But he had regularly been putting savings aside each month for anything unexpected. He liked to call this his ‘sunny day fund’ – a more optimistic and positive approach to saving for the unpredictable. Whether that be for stressful or enjoyable things, he’d built up a fund over time in a separate savings account.
Kieran had saved enough to cover a few months’ of living expenses. So, he managed to pay for his car repair and had some breathing room to build his client base back up without struggling financially. This, paired with sticking to a budget each month, really helped him during a time where he could have easily been financially vulnerable without his savings safety net.
The difference in Zara and Kieran’s situations in the case studies were a matter of preparation. Everyone could benefit from trying to save where they can. Even starting small and building up an emergency, or ‘sunny day fund’, can make a big impact over time. It can help give you peace of mind in the event of unexpected expenses, good or bad. It also means you will be less likely to get into financial difficulties, such as debt, during these times.
The concept of a ‘rainy day fund’ can be seen as outdated. Switching to saving for things to look forward to could make saving up more enjoyable and motivating, even if you do have to use some of it to cover an emergency.
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