Covid-19 has upended our lives. It’s revealed how vulnerable we all are, how fragile our lifestyles can be, and how essential it is to have savings. Whether you’ve personally been affected by job loss or salary cuts or financial insecurity, there’s no doubt that the pandemic has emphasised how devastating it can be to suddenly be out of work and out of money.
No wonder then that conversations abound when it comes to the importance of having an emergency fund.
Sometimes known as a rainy-day account, a ‘f*ck off’ fund, or a financial safety net, the emergency fund is ultimately there to give you security in turbulent times. This is also why financial advisors such as Carl Richards and Manisha Thakor call it an ‘uncertainty fund’ — after all, the amount you need to save is ultimately a response to how much uncertainty there is in your life.
And right now, that could mean a lot more than just a few months ago.
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How much should I have?
The general rule of thumb is that an emergency fund should have three to six months of your average monthly expenses. This fund should be easily accessible if you need to use it and must therefore keep it as cash in a bank account (e.g. a flexible savings account).
However, an emergency fund is much more than just ready cash. If we approach it as a response to uncertainty, it’s really about what we need to feel secure.
For example, you will likely need less money to feel secure if you’re in a stable job with a good income and more if you’re running your own business or freelancing. The same goes if you’re in a relationship or single with no dependents where you’ll likely need less money saved than if you have dependents or large financial obligations. This is because there’s more risk in your life in the latter scenarios than in the former ones.
Suggesting that having three, six, or twelve months salary stashed away is ‘enough’ for an emergency fund therefore doesn’t really work. Not only does it depend on the amount of risk in our lives but feeling secure is also a personal thing. After all, our mental wellbeing and financial wellbeing are very much intertwined. Some of us prefer to have more saved than others. It’s about preference and there’s no ‘definitive answer’ on how much you should have. Instead, we need to reflect upon our individual financial situations and be mindful of how much we’re saving and why.
One key thing to bear in mind with your emergency fund is that it’s there for your security — but that doesn’t mean you can’t use it for ‘non-emergencies’. Glamour magazine reported that 71% of women have said they’ve stayed in a job because they can’t afford to leave and a third have said they’ve been financially trapped in a relationship. Building up your personal emergency fund gives you the choice and ability to make a change in normal times, whilst also protecting you from whatever life might throw your way.
Who needs one?
Everyone. No, really. Everyone needs an emergency fund.
Whilst some assume that emergency funds are primarily geared towards women — perhaps due to Paulette Perhach’s viral 2016 essay urging every woman to have a f*ck off fund — having savings that you can fall back in uncertain times on is certainly not a gendered need.
As Nina Mohanty, a fintech specialist and entrepreneur in London, says, “I find it super-gendered, although it shouldn’t be. Things like domestic violence, less job security, the gender pay and wealth gap, make it more of a priority for women — but young people, people in precarious work, people with families and dependents, all need to create financial safety nets for themselves too.”
The fact is studies show one in five British people have no immediately accessible savings, with the number of households with no savings rising dramatically in recent years. Regardless of gender, ethnicity, or relationship status, having money you can fall back on is something that anyone can benefit from.
As Bola Sol, financial wellness coach and entrepreneur, told Refinery29: “It’s imperative people prepare for uncertain times, especially as working conditions are changing. If you don’t have [an emergency fund], you should get one.”
How do I get started?
There are myriad ways to start building your emergency fund — but it starts with a budget.
As we’ve said before, there’s no right or wrong way to make a budget. But there are plenty of ways to start, not least by sitting down and working out exactly what your essential outgoings are — ie. your rent or mortgage, council tax and energy bills, weekly groceries and travel costs etc — and then comparing it to what you have coming in. This will immediately help show how much you can afford to save and whether there are additional cuts or savings you can make.
However, one thing to be very conscious of is your debt. Personal loans, credit cards, mortgages, and overdrafts are all things you’ll want to factor into your budget and track along with your daily spending, including interest rates. Plus, any high-interest debt is something you’ll want to try and pay off as quickly as possible.
At first you may therefore want to use the savings you’ll later put into your emergency fund to reduce your debt — this is because debt can cost you hugely and can counter any benefits to saving if left unresolved. If you’re looking for tips, Clare Seal, founder of @myfrugalyear, has some great insights based on her own experience of clearing debt.
In terms of putting money aside, people also have different approaches. Personally, as soon as I’m paid, I like to divide my money up into spending money, saving pots and investments. It’s a quick transfer to different accounts and it means I can’t accidentally spend money meant for my savings because it’s already transferred. On the other hand, my friend Chris prefers to try and remain frugal throughout the month and transfer whatever’s left at the end to his savings.
Where should I keep it?
The general advice on having an emergency fund is to ensure that it’s easily accessible and safe. This is why most people keep their emergency cash in a fully-licensed bank account — savings or current — that’s protected by the FSCS (Financial Services Compensation Scheme) up to £85,000.
But one thing to bear in mind is that stashing away large amounts of money in a savings or current account, even with low-interest rates, may mean losing value to inflation over time. As Ed Gjertsen, a financial planner speaking to Nerd Wallet, says, “With interest rates at zero-point-who-cares, it is more costly for people to leave money in safe places. You’re just not making a relatively good return on that investment.”
With this in mind, some experts suggest that you may not want your emergency fund to grow ‘too large’ in a bank account. Instead, it may be helpful to set a goal for your emergency fund, with a view that any additional money saved after that point goes towards other savings goals, investments, or pension pots.
Some people also choose to use a portion of their additional savings (but crucially not the emergency fund itself) to invest in lower-risk funds that may help them build up a buffer for bad days. These are often options that allow withdrawals with minimal penalties so that they can supplement an emergency fund if necessary.
An example of this could be ikigai’s “Safety Net” goal — and it’s a feature I find particularly useful about goal-based investing in general. There are portfolios designed to help grow wealth that take on more volatility, but there are also options to invest towards your safety net by taking on less volatility. In this case, investing on top of having an emergency fund may help to support both your short and long-term sense of security. Whilst your capital is at risk, there’s also the chance you may benefit from potential returns.
Ultimately, emergency funds help put you in control of more than just your money.
It allows you to quit that job, change that relationship, pay to fix your car or your roof or replace your fridge without worrying. It allows you to take more risks in your career. It provides a level of financial freedom. And it puts you in control of the way you live.
It is more than just money in the bank. It ensures that you have options even in turbulent or uncertain times. Even when those times include a global pandemic.
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