It is wise to have some money kept by in case you are suddenly short. Although an overdraft or credit card could help us out if we do need money in an emergency it is not a cheap option. It is also not always an option for everyone, it depends whether you have those facilities available to you. Therefore it does seem wise to keep some money handy.
It is worth keeping money in an account which is easily accessible. This means that you can get to it quickly if you need it suddenly. You may want to also keep some money in a less easily accessible account where you can get a bit more interest on it but still get it fairly quickly if you need it. But how much is a good amount to keep in each account?
Emergency money is likely to be needed if you have a bill that needs paying and you have run out of money or if you need to replace a broken white good or something like this. The amount that you will need for something like this is not likely to be very high. It is probably wise to think around £500 to £1000 to keep for this sort of situation.
However, it is also worth thinking about other situations where you might be short of money. Imagine that you are made redundant or ill and unable to work. You may find that you will struggle for a lot longer. It is often advised that you keep 6 months’ worth of money to help with this situation. This means to cover six months’ worth of bills, rather than six months’ salary. This could vary greatly in amount depending on your specific standard of living. It may seem a lot of money to save, but it will give you security of knowing that you will be able to manage if something unexpected happens.
Of course, if you have debt, then it may be better to actually use the money to repay this rather than saving up. For example, if you have a credit card which has money owing on it, then it makes more sense to pay that off rather than save. If you keep the card, then that will be your emergency backup, should you need it, as long as you do not spend too much money on it. The same goes for an overdraft, pay it back as soon as you can as it is very expensive and you will be able to use it in an emergency should you need to. Ideally you should pay off your expensive debts and then start to save money so you have a backup fund and no debts. Some debts are cheaper than others so look to pay off the ones with the biggest APR’s first.
Obviously saving up like this can be difficult. It is worth trying to do what you can to keep motivated. If you are saving for a holiday or something else specific then it is easy to be more motivated to reduce spending and save money because you have a treat in the future that you will be buying with the money. However, if you are saving for an emergency it does not have the same motivation. It can seem rather boring and almost annoying that you are putting money away just in case something happens and you may not even need it. However, it is extremely unlikely that you will never need to use it as there are often things that we need money for over the years. White goods do not last forever, homes need repairs, bills come along unexpectedly and Christmases and Birthdays pile up. It is worth thinking about the relief you will feel if you need money and you know that you have it there when you need it. Knowing that it is there can bring great peace of mind and so it is worth focusing on that as much as you can. Knowing that you have a nice chunk of money sitting there in case you need it can bring as much happiness as saving up to pay for a holiday and until you have achieved it you will not know how it feels so will just have to imagine.