Is having an emergency fund essential?

In today’s uncertain economic times nothing can be taken for granted. Numerous organisations have gone bankrupt over night and with little warning, meaning that many people have been put out of work.

This may be an extreme example but it is just one reason why every family should have a cash nest egg of savings with which to be able to fund at least 6 months of normal spend without any income.

But it doesn’t have to be the loss of a job that creates financial strains. It could be a reduction in hours or loss of overtime that creates a shortfall or a sudden and large unexpected bill. Also, not all organisations pay for time off sick or have a maximum number of weeks on full pay before reducing to a minimum amount.

Creating a cash nest egg takes time and it should be in a safe place where it earns the best possible return. With inflation at 5%+ and savings rates at 3% at best, making sure every penny is saved makes a difference over the long term.

ISA’s (read more here) are a tax free way to save over £5,000 and any tax payer can have one. That means a couple can have over £10,000 in separate ISA accounts earning tax free interest.

Holding an ISA account means that the cash is out of sight from normal financial affairs, although the cash may still be available for instant access if required, depending on the account provider.

Some ISA accounts offer fixed term deals with better rates of interest where some penalties may be incurred for early withdrawal.

A buffer fund of at least six months means there is time to take stock and work out how to react to the events that have caused the crisis. It takes time to rein in spending and get a good debt management plan together so having a financial cushion period to help means staving off immediate problems.

Building up a savings pot takes time, especially when the family finances are stretched already. But even putting away a small amount each week or month can help grow a modest savings account.

Over the course of a year £20 saved per week will be over £1,000 plus the accumulated interest. And the more saved the quicker the fund will grow.

As a guide, £8,000 is the six month safety net that families on the average wage of around £22,000 a year should aim for.

Louise is a writer in the UK for Moneysupermarket. You can follow her on Twitter @L00ty.


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