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You Are Here: Home > Personal Finance > Banking & Saving > FAQ > Question and answer
What's an Emergency Savings Fund

and why it's important to have one

An Emergency Fund is a savings account that's designed for emergencies, the main one being - loss of job.

The fund should have a minimum of 3 months and preferably 6 months of average monthly outgoings. So if you currently spend around £1,000 a month, look to deposit £3,000 - £6,000 in your fund.

But why do most people need such a fund?

Because statistics show that well over 50% of the working population have less than 1 month of savings in reserve. So lose your job, struggle to find a new one immediately, and it won't take long to be in serious financial difficulty.
How to fund an Emergency account

Most people won't be able to fund their Emergency account in one go. Instead they work out a plan to fund it over 1 -3 years. For example, if your fund needs a minimum of £3,000 why not pay £150 a month for 20 months.

The trick is to get organised and set up an automatic monthly payment from your current account to your new savings account. Internet banking makes this simple. See also - Simple steps to safer internet banking. Also secret number 4 - The internet - 4 reasons why it's your financial friend which is one of this site's 10 Secrets to Good Personal Finance

Open a separate bank account

The best savings accounts are normally the ones with the best interest rate and the most flexibility, where flexibility relates to how easy it is to access your money. For example, there's no point earning the best interest rate available if the account is a Notice one, where 6 or 12 months notice is needed to access your money.

So you must choose an instant access account, or at least an account that has a maximum of 1 month's notice for withdrawals. The chances are that the best account won't be offered by your present bank so you'll need to open a separate account.

Summary

An emergency Fund is a classic example of good personal finance because -

  1. It makes sense, and
  2. It's simple to understand and set up

It is unlikely that most people will not be able to fully fund their account immediately but with commitment and careful planning such an emergency fund could be set up within a year.

If you like the idea of an Emergency Fund you also might like this site's 10 Secrets to Good Personal Finance.


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