An emergency fund is a very important part of being financially secure. It is a savings account that you access only in the case of emergencies.
So, deciding to build up an emergency fund is a great way of not having to worry so much about these unexpected little blips in life. The fund can also save you from having to take out a loan in these cases, meaning that it will also save you money in the long run.
What Would I Need an Emergency Fund for?
The whole point of an emergency fund is that you do not know what it is going to be used for. The only thing that you know is that it can save you financially (and perhaps mentally as well).
However, we will include some examples of what the fund should be used for to give you a rough idea. Frivolous things such as buying a new TV are not ’emergencies’ and so should not be treated as such. Emergencies can include:
- Losing your job
- Becoming ill
- Car repairs (or having to buy a new car)
- Funeral costs
- If you have to take time off of work for any reason
- House repairs (not aesthetic)
Any of these examples are things that can be very expensive and need to be solved as quickly as possible.
Where Should I Keep My Emergency Fund?
It is very common to simply keep your emergency in a current account. However, unfortunately, this means that your savings will decrease in value in line with inflation. So, by the time that you need to use your emergency fund (which is hopefully never), you may have a lot less money than you initially did.
Instead, once you have accrued the desired amount of money you should consider placing it somewhere where it can gain in value. Even simply placing your money into a high-yielding savings account is a better option. Whereas normally a bank account will give you 0.1%, this type of account can offer you much more.
If you are up for taking a bit more of a risk then you can even consider enlisting the help of a financial advisor to aid you with investing your money. This way it will not lose its value simply sitting in the bank.
What to Do After My Emergency Fund Is Fully Funded?
If you are fortunate enough to be in the position that you have a fully-funded emergency fund, you may be wondering what to do next. Luckily, we have made the process simple for you.
There are still many things in life to save for, so even though you may have covered yourself in the case of an emergency, there are still more things to work toward. We will detail these below.
Save Up for a House
Typically, market prices increase year on year. So, one of the best things that you can start to do after you have fully funded your emergency fund is to start saving up for a house.
The amount of money that you will need for a deposit will depend on the value of the house that you want to buy and the percentage of that sum that the mortgage lender requires.
However, this can be a very large expense so it may be best to decide to save a certain percentage of your income every month. That way you will know exactly how long it will take you to save up the amount needed to put down your deposit.
The more money that you can put down as a deposit the better off your monthly expenditure will be after this. That way you can then start saving up for other expenses down the line, such as retirement.
Save for Retirement
Nobody wants to work forever. In fact, for most people the earlier they can retire the better! Remember that other expenses, such as buying a house, paying off any debt, or buying a car will typically come first. You should prioritize them before saving for retirement so as not to financially burden yourself later on in life.
Save for Your Child’s Expenses
If you have children, another thing to consider saving for is their expenses. This can include anything from money for school trips, a gap year, and even college tuition.
All of these things can be very expensive and may even be impromptu decisions. So, having some money squirreled away for them is a great idea.
College fees and textbooks can be incredibly expensive and so the more money that you can put upfront the less that you will need to borrow in loans.
Even if your child decides that college is not the right option for them and their life then you could always help them financially toward buying a house, a car, or even a wedding. The idea is that your savings can help them financially too by reducing the amount of money that they will need to borrow in the future. This effect can then snowball over generations.
Enjoy Your Money
At the end of the day, you work so that you can have money to enjoy your life. So, as long as you have all of the basics covered and you can afford your lifestyle then put some money aside for little treats, holidays, and days out as a family. This way you can be both practical and happy with your earnings.
Having an emergency fund is a great way to make yourself financially secure. You will no longer need to worry about finding the money to fix your car or the roof.
Instead, you can be safe in the knowledge that you have that covered. If you have achieved the sum of money that you wanted to save as an emergency fund then you have several options.
You can start saving for other large expenses, making your future more financially secure, for example, putting money towards a deposit on a house, paying off debts, savings for your children (for future children), and then eventually for retirement.
As long as you are able to cover your basic costs of living then budget the excess income. That way you can set financial goals and continue working towards them whilst also allowing yourself a little bit of play money to save up for things such as holidays and material possessions.
By knowing that you have a fully-funded emergency fund to fall back on you can begin saving for the big concrete purchases in life.
Image by Karolina Grabowska