6. Save An Emergency Fund – 12 Tips Of Christmas

The 12 Tips Of Christmas – All 12 Tips Of Christmas Posts

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Merry Christmas and welcome to the sixth post of my 12 Tips Of Christmas series. 

These are a series of posts that will be going out on the lead up to Christmas and the New Year to help guide you towards a better money mindset with an aim to give you a base knowledge of personal finance.

I think I’ll be preaching to the choir with the majority of the readership here, but it’s a must for anyone looking to start themselves on the long path towards financial freedom.

And because this is a series outlining the basics of what we need to think about when organising our finances, we’re giving a post over to building ourselves an emergency fund.

It’s typically suggested that you set aside around 3-6 months of necessary expenses in a little side pot or savings account that’s easily accessible and connected to an account you mainly use to pay for things.

If 3-6 months seems too much at this early stage of organising your finances, just focus on it bit by bit, as outlined in my goal setting post. Save up a weeks worth of expenses. Then two, then three and build it up from there. Or set 1% of your pay cheque aside the day you’re paid, then 2% the next month, then 5% the next if you’re feeling comfortable, until you find your sweet spot that helps you save but doesn’t feel like you’re depriving yourself.

Dave Ramsey suggests starting with $1,000. He also advocates saving this amount before really focusing on any debts you may have. This will be on a case by case basis, and will depend on the interest (cost) and size of the debts, but having that small cushion will allow you to focus on paying down those debts while having a small amount set aside in case another emergency happens at the same time. This hopefully means you don’t have to burden yourself with even more debt.

This is your little safety net pot that allows you to sleep at night. Having this pot is setting you up for never losing sleep because of money worries about emergencies that could set you back.

Now some people in the personal finance community will search high and low for the best interest rate for this emergency pot. Personally, in this low interest period we’re living in I couldn’t care less about the interest I’m earning on mine.

This little pot is not there to make you wealthy. It’s there to be as accessible as possible. If that means foregoing 0.00004% then so be it. In my opinion the hassle of transferring from bank to bank just for that extra £12.37 just isn’t worth it. You may feel different, and that’s perfectly ok too, but that’s just how I want to manage the pot of money that allows me to know, no matter what, I can pay for a car repair, or last for X months if I become unemployed for any reason.

If you’re really financially savvy, there’s an argument for not having an emergency fund and paying for everything on credit in order to maximise the amount you’re putting into your investments. After all it only takes a split second to sell and is very easy to transfer any cash balances in your investment account to your main bank account. The idea being that the credit you use can easily be covered in the short time it takes to sell down and transfer out.

However, this is probably not the approach most people will want to take – take Covid as an example. If the market drops and you lose your income source all at the same time, you’re losing out twice and your investments may not cover all your expenses.

This approach could be used for Premium Bonds though. It’ll take a few days to sell your Premium Bonds and transfer them to your account, but at least this money is guaranteed. It’s not guaranteed to earn you anything, but as I’ve mentioned that’s not the intention of an emergency fund.

So it’s always best to have some sort of liquidity on hand, readily available.

And finally, remember that cash doesn’t always mean immediate liquidity. Cash Lifetime ISAs for example have restrictions and penalty charges on withdrawals for any reason other than a first house purchase. Likewise, a regular saver may have withdrawal restrictions, or at least interest penalties if you withdraw early. I would use these savings vehicles as secondary savings pots rather than using it to hold any emergency money.

So whether it’s for emergencies like car repairs, house or utility repairs, or for big lifestyle changes like the loss of a job or needing to find that bit extra money to feed an extra mouth, having ‘cash on the hip’ (not literally – don’t keep your emergency fund in cash under your bed) helps us afford the tricky unexpected life events without the need to put additional stress on ourselves by funding it with credit (debt).

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