Contrary to popular belief, emergency funds are cool.
Yes, you heard me right. What’s cooler than being prepared for something? Than being like ‘uh oh wasn’t expecting that bill’ and then smiling and going ‘no worries, I got it covered’? Than confidently nodding when the mechanic says ‘sure you’ll be able to cover the cost?’? Than people looking at you suspiciously but also in awe when you tell them you have an extra £5,000 ready for emergencies? Call me a weirdo, but to me, that sounds pretty cool.
You may believe that at a young age an emergency fund isn’t necessary, thatwe don’t really have emergencies (unless you count running out of beer), that they could always use a credit card or ask someone for help. True, but emergency funds have more to it than meets the eye.
What exactly is an Emergency Fund?
As you may have guessed, an emergency fund is an amount of money you put into a separate bank account or somewhere that’s easy to access especially for emergencies. This is money you want easy access to and won’t disappear into thin air (so no, don’t put it in crypto).
How much? People recommend different things, but as a university student on a shoestring budget I’d say something like 2-3 months worth of expenses. After doing your budget you’ll have that 15% to play around with and can use some of it to build up that emergency fund like Jimmy does.
There’s a huge debate on where exactly to put this amount of money. If you build up a large emergency fund and end up with something like £5,000, putting it into a savings account might not be the best idea: inflation will eat away at its value (if you do have such a large emergency fund, check out this great Reddit thread). But if you’re emergency fund is something like £1,500, I wouldn’t worry too much - a savings account is a good place to start.
The great thing about EFs is that you’ll still have it once you graduate. You’ll be one of the few students graduating with a good cushion of money in case you don’t find a job - a great achievement. You’ll be prepared for adult emergencies (and there’s more of them, I can assure you) and you won’t be pressured to find a job immediately. Another reason why that’s great: you’ll sleep better at night. I’m telling you, it’s the key to adulting.
When could you need it?
Many of you might be wondering: ‘what emergencies are we talking about exactly?’
Thinking from the perspective of a student:
- Car repairs
- Unexpected bills (electricity, gas, etc)
- Emergency travel (missing a train and having to buy another ticket quickly)
- Laptop/phone/tablet breaking down
- Glasses breaking (yes happened to me)
- Losing your part-time job
- Health emergency !!
So yes, you do have emergencies to prepare for. And not only will you be able to cover them, but doing so also shows your parents and maybe even third parties (banks, future companies) that you’re responsible and willing to pay for your own emergencies. They’ll be more willing to help you out and cover part of your costs in the future if you show them how well you’re dealing with them overall.
And no, emergency funds are not for holidays, a new laptop, new clothes or even more beer. Put the money aside and forget about it until the emergency comes.
How to build your fund
Building an emergency fund is pretty basic: bit by bit. If you’ve followed the 15% rule when making your budget, you’ll have that extra bit of money each month to allocate it to debt, personal goals and your emergency fund. In the article’s example, Jimmy decides to put away £31.88 every month towards building his EF. As his income fluctuates he’ll put in more or less, with the goal of eventually reaching 2 months of expenses.
So it’s very simple:
- Calculate how much you could set apart every month to build up your emergency fund. Start with the 15% rule and work from there
- Open a new bank account
- Set up a direct debit to that bank account so you send the same amount each month
- Relish everyone’s awe when you tell them you’re prepared
Yes, this is a shorter article than the usual ones, simply because Emergency Funds don’t have that much to it: building an extra fund bit by bit so you can sleep better at night and be prepared for whatever life throws at you.
And personally, I find building my emergency fund very motivating; I feel like a responsible and clever adult who seems to have at least one thing figured out. It’s also one of the essentials to breaking out of the rat race: if you lose your job, you’re not desperate to find another. And that, my friends, is called being financially intelligent.
