Everyone needs to prepare for the unexpected. An emergency fund you can access when you need it most is probably the most important savings goal you can set yourself.
But this cash needs to be accessible fast, and very low-risk. That means your rainy day fund is not going to grow very quickly as an investment. You’ll want a separate pot if you are searching for real investment returns. So how much is enough for an emergency?
The rule of thumb…
…is that between 3 and 6 months of after-tax income is about right. That will give you the breathing space you need, say, to pay immediate bills, cut your spending, and find a new job.
But everyone’s different. So consider your circumstances when you set a target. If you’re the sole earner in your family, for example, you might want to set more aside. Likewise, if you have several dependents.
On the other hand, if you or your employer have decent insurance provision, and you have a very secure job, you might decide to leave less money in your emergency pot. You could channel the extra money into investments that have a better chance to earn you a good return.
Make a start
Moneycube’s Picture your Money tool gives a good initial indication of what your rainy day fund could look like, and whether you have enough in place already.
In any case, something is better than nothing. So if you’ve not done so already, and you are free of expensive debt, start now. (If you have expensive debt, like a credit card, it is almost certainly better to pay this down asap). Start small, be sure to set a target and build towards it regularly.
Where to put it?
Most people keep their emergency fund in a deposit account. However, you don’t want your fund to be too easy to access. Not all big costs are emergencies! For example, your car insurance might be expensive but you don’t want to be digging into your emergency fund to pay for it. For that, you need a cash buffer for your everyday costs. If you have a big enough buffer in your bank account for major expenses, you could consider investing your rainy day fund in low-risk investment funds.
Get started with Moneycube today