Prepare for the unexpected by starting an emergency fund

It may sound like blatantly obvious advice, but setting up an emergency fund is truly important.

14:38 20 January 2014

An emergency is by definition something you cannot really plan for; it is unexpected and serious. You cannot predict when something bad is going to happen to those who are close to you. You also cannot be sure that when an emergency strikes you will be able to use credit instead of cash. This is why it is important to create an emergency fund. 

 

Here is what could happen if you do not have an emergency fund. In this example, consider the problem of losing your job. 

 

• Without an emergency fund if you lose your job you will end up using credit, if available, to make ends meet. You could rack up a considerable amount of money provided all your bills can be paid via credit. For the sake of this example say your monthly bills are £1000. You are jobless for four months. This means that you have added £4000 to your credit card. 

 

• You are in luck, you have obtained new employment, and this employment pays you £1100 a month. You now have enough to make your basic bills but with an additional £4000 on your credit card, your minimum payment has just risen to £100 a month. You are still in a bind. 

 

If you had an emergency fund, which contained several months' worth of funds, you could have been in the clear. The best saving option is six months' worth of bills. You would be out of the financial bind and while your funds would be tight, you would not be looking at how to pay off such a large amount of debt. 

 

Setting up an emergency fund is not difficult. There are plenty of savings account options to help you out. You can set up an account easily and place so much per week or month into the account. Soon you will have the funds you need to handle any urgent situation.