So you’ve got it all figured out. You’ve got used to earning £1,500 every month; you know you transfer £800 into your joint account for bills, you’ve got your monthly car payment of £200 leaving you £500 to live off now until your next pay day. You know you have a friend’s birthday night out next week, so it’s going to be a bit tight, but you should be able to make it through…. And then it happens! No sooner will you think you are on top of things, and something out of the blue happens leaving you with a big expense which you haven’t factored into your budgeting.
It’s when you least expect it that someone drives into your car, or your boiler breaks, or you have to fly home to attend a family funeral. That’s when you need to make sure you have some savings set aside for the unforeseen time when you really need it.
FINANCIAL RULE OF THUMB – HAVE AN EMERGENCY FUND
You should have between 4-6 months of your income, or at very least of your expenditure, in an instant access cash savings account, for when the time comes. Something can happen in the house, but equally you could lose your job and you might just need the cash to cover you when you aren’t earning for a few months.
Last week, an American personal finance website, Bankrate, produced a report from a survey they ran at the end of December 2015, which showed that only 4 in 10 people (37%) who, when faced with unexpected expenses, would have sufficient savings to pay for it. Apparently 23% would reduce their spending to cover the cost, only 12% would pay for it on credit cards, and 21% would borrow from friends or family. The remainder of respondents would use other means, which would most likely include the helpful person from your local pay day loans company – the worst idea you’ll ever have.
Before you start spending your money on clothes, or holidays or something which isn’t absolutely necessary, set aside some readily available cash for when you need it most. An emergency fund is something all of us should have, and if you don’t it should be your first savings goal. I’m not saying you have to expect the unexpected, but be a good Scout, and “always be prepared…”