So you’ve made the usual New Year’s resolutions. You’ve resolved to go on a diet, take more exercise, take up a new hobby and stop drinking.
There’s a lot of pressure that comes along with keeping a resolution. One minor slip-up, and it can feel like it’s all come crashing down and there’s no point in persevering with it. There is, however, one resolution that you should make and keep this year: start an emergency fund.
Why you need an emergency fund
Sooner or later, some emergency or unexpected expense seems to crop up out of the blue and catch you off guard. It could be anything from the car packing up to something more serious, such as losing your job. It’s important to put some money aside in case of an emergency.
Research we’ve carried out shows that an unexpected expense or change in circumstances is common and can push people into debt. However, we’ve also found that having a small amount of emergency savings can provide some effective protection against a debt problem. Over half of the people we asked told us that emergency costs they had to pay could have been covered with savings of £300, we recommend saving £1000 to get a sensible safety net in place.
In other words, an emergency fund can help to stop the need to use credit to pay for unexpected expenses.
Determine how much you can afford to save
However, even if you don’t have much to save, it doesn’t matter. Even a small amount each month will add up.
Your ultimate aim would be to save enough to cover at least three months’ worth of mortgage or rent payments and priority bills. Don’t worry if you don’t have this money immediately, or even in the first year or two. Take time to build your fund up gradually.
Ways you can save money for your emergency fund
Open a separate savings account: A lot of people start emergency funds with good intentions, but then dip into it as soon as it starts to grow. Keep your emergency fund separate from your other accounts and only use the money in a true emergency.
Apply for a basic bank account with a bank you owe no money to: Basic bank accounts give you just what you need without all the fancy features a current account sometimes comes with (also, there’s no chance of going overdrawn so no potential of getting into debt if you do have to withdraw the money).
Alternatively, Credit Unions are becoming more and more popular as a safe place for your savings. Some employers will let you pay into a Credit Union account at source, lessening the chance of spending your emergency fund even further. Be aware however that you may need to call into the branch during opening hours to access your money, which may not be ideal in some emergencies.
Save your change: Save up any coppers you get through the day and put them in a jar. We swear by the ‘money tins’ you can get in pound shops, as you have to open them with a can opener to get at the money inside. This prevents any impulse to dip into the coffers!
Once a month, put the money into a savings account either by paying in over the counter or via internet banking. You’ll be amazed how quickly it mounts up. If you’re paying the money in over the counter, make sure you bag it up into correct denominations first. Please note: some banks will only let you pay in five bags at a time.
You can also use ‘Coinstar machines’ that can be found in many big supermarkets. Simply dump all of your change into the machine and you’ll get crisp pound notes in return. Keep in mind however that these will charge a fee for converting your coins to notes (there’s no fee for depositing your coppers in the bank).
If you use the self-service checkout machines at supermarkets, try only using the coins you save and then put the equivalent amount in notes away in savings. It saves you making several trips to the bank with your coin bags because there’s no limit to how many notes you pay into the bank in one sitting. Also, it’s fun to drop coins into the self-serve machine (it reminds me of those penny machines on the seaside!).
Get money off your bills and online purchases: People who regularly price-compare their utility bills can potentially save hundreds of pounds per year. You would probably have spent the money that switching saved you anyway, so you might as well drop it into your rainy day fund. The same goes for mobile phone bills. Use cashback websites such as TopCashBack and Quidco to earn money back on online purchases.
Cut back on unnecessary spending: Items such as weekly magazines, coffee on the way to work and meals out all add up. Keep a spending diary. Look at where your money is going and find things that can be cut back.
Even if you’re not exactly a ‘weekend warrior’ you can still save money you’d normally spend when socialising. Seeing friends is really important for your wellbeing, and it’s possible to still have fun with them while spending very little money. Movie nights in the living room, countryside walks and potluck dinners can be a fun and cheap alternative to going out gallivanting. Our article on seeing friends while trying to be thrifty can help.
As many of us know, saying goodbye to the cigs is vastly easier said than done, especially in stressful times. We’ve written an article that explores where you can go for free support to help you quit smoking.
You don’t have to cut what you like out completely, but reducing the cost by half can mean that your emergency fund is saved up much quicker!
Take on a money saving challenge: Many people need a goal to work towards when saving up money. Taking part in a moneysaving challenge gives you something to work towards. Every year, Ricky Willis a.k.a Skint Dad runs a 1p Saving Challenge on his website. There are variations of the challenge, so pick the one that’s right for you.
Ricky predicts that you can save over £650 a year by taking part in this money challenge. That could easily pay for a new washing machine if your current one kicks the bucket.
Bring in extra income: This one probably sounds like a no-brainer, but it mightn’t be as time consuming to earn extra money as you think. Sure, there’s the obvious (do some overtime or another job and put it in the bank), but thanks to the web, there are a wealth of ways to earn some extra cash. Our ‘Weird and Wonderful Ways to Make Money‘ series can help you get started. It may also be worth checking if there are any benefits you can claim, even if you already claim some.
Unexpected crisis and no emergency fund? Apply for help
Sometimes, despite your best intentions it’s incredibly difficult to put money aside for an emergency fund. Due to a cash crisis, such as suddenly falling ill or losing your job, you may find yourself unable to pay for food or other essentials. We hope you never find yourself in this situation, but there may be emergency money assistance available if you do.
What are your New Year’s resolutions this year? Was starting an emergency fund one of them? We would love to hear your experiences!