A Small Emergency Fund is Better Than None At All

If you’ve heard it once, you’ve heard it one-thousand times: It’s important to save money. While the notion is widely accepted, applying it to your finances may be more difficult than simply believing it’s a good idea. If you’re like many UK consumers, spending obligations pull at your paycheck from every direction, so setting aside savings often loses its place to other pressing priorities. In fact, the balance recently shifted to negative territory when UK consumer spending overshadowed earnings for the first time in decades.

As a challenging household cash flow cycle continues, with no way to interrupt spending demands, you may even abandon the goal of building personal savings, believing you’ll never find a way to put by a six-month reserve. If there’s any way to avoid it, it’s a mistake to turn your back on building a personal rainy day fund. A recent article suggests it may be a better idea to lower your expectations, working toward incremental gains, first building a “drizzly” day fund, on your way to putting by a proper household emergency account.

How Much Do You Need?

Conventional recommendations advise keeping a household emergency fund with enough money in it to cover costs for at least three months. Most financial planners would say six months’ worth of expenses in reserve provides an even better safety net than does a three month cushion. With these goals in mind, too many UK families simply give up, feeling as though they’ll never reach these levels of savings.

Even with substantial income flowing through your house it can be hard to meet savings goals. Tandem Bank suggests that smaller sums held in reserve may still have a positive effect on family finances, even if savings don’t rise to the recommended 3-6 month threshold. Using data about customer spending, Tandem advises a pot of £500 goes a long way mitigating a household cash flow crisis. According to the bank, a £500 fund serves as a financial lifejacket, even if savers cannot afford to save for the whole boat.

Loans are available to cover costs between paychecks, but a small reserve fund can also help meet spending demands when unexpected expenses arise. The bank analysis looked at what credit card users customarily spend on common pop-up expenses. The study found that when service was needed, card users spent an average of around £450 on car parts and repairs. And when heating and cooling contractors were called in to make residential repairs, the average fee for services was just over £300 per transaction.

Although £500 is less than the total amount you’d like to have in your rainy day account, the sum is enough to cover many unexpected expenses. Setting your sights higher may provide additional peace of mind, but maintaining the small safety net can be enough to keep the cost of car repairs and household emergencies off your credit cards, which will cost you less in the long run, without paying interest and fees.

Help Finding Financial Reserves

Whether or not you can put by six months expenses in reserve, it’s wise to start saving, so you’re not among the substantial share of UK households without any money in the bank. If you’re having trouble getting ahead, focus on reaching an attainable savings goal, such as £500, and use these strategies to keep on track:

  • Add technology to your team – Automating savings takes the decision out of your hands, making it easier to accumulate money in your contingency fund.
  • Fill small pots – Setting aside cash and savings in small pots helps you build reserves, without missing the money in your day-to-day spending budget. The low-tech approach may include a few accounts, devoted to different saving needs, as well as a few places to stash cash at home.
  • Make up ground when you can – Cash flow isn’t always evenly distributed, so it’s important to focus your savings efforts when money is available to boost your emergency fund.
  • Cut back for the sake of saving – Finding money to put by sometimes requires small sacrifices. If your emergency pot is underfunded, consider cutting back treats, in order to free more money for your savings.

A well-funded household emergency account can keep your finances on track when unexpected costs arise. Although a few months’ expenses held in reserve is ideal, even a small nest egg of £500 can help you avert crisis when your financial flow is interrupted by unforeseen spending demands. If you’re slow to save, because you don’t have much extra money to work with, wade-in at your own pace, building a small emergency fund to build on as your finances improve.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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