Of the many benefits that the habit of saving money has to offer, being financially stable despite an emergency is one of the more important benefits.
Setting aside a small amount of cash can significantly dampen the otherwise drastic effects that one may experience during an emergency.
The consensus is that one should look to save money for the next 3 to 6 months, which will act as the emergency fund or cash.
The exact amount that constitutes a significant emergency fund that could cover one’s expenses during an emergency differs depending on the city a person is living in.
For example, a resident in London will have to collect more as emergency cash as the standard of living is higher than that of a person living in Belfast.
In fact, according to some sources like the Joseph Rowntree Foundation, the average person requires £157 per week for a single person. Therefore, the emergency cash that they should save is around £14130 to £28260.
Other reports state that a family of four requires at least £3,803 every month to sustain a family of four. Again multiplying that number into 3 to 6 months will give the emergency cash that one should save up.
When should one use the emergency cash?
Emergency cash aims to cover the costs of the essential aspects of one’s life.
Therefore, to determine how much cash one should look to categorize as emergency cash, consider the following expenses:
- Housing expenses, whether it is rent or a mortgage and other forms.
- Healthcare expenditure like insurance and other medical accidents.
- Utility bills like electricity
- Expenses in relation to food
An individual who takes out loans will also have to set aside a certain amount to cover their debt. Therefore, one has to determine how much they pay for all these expenses on a weekly or monthly basis.
How much should be stored at home?
Although an individual should save expenses for around three to six months, another question will arise. How much of this emergency fund should one store as physical cash in their homes?
It is not safe for anyone to keep thousands of pounds in different nooks and crannies around the house or all together in another place.
This is especially risky when one lives in an area with higher crime rates. Therefore, to solve this problem, one should look to create what is known as an emergency buffer.
This buffer refers to the money one has in hand and at their disposal whenever they face an emergency.
Having this buffer is also more plausible for the individuals working at lower-income jobs or are required to provide for a large number of people.
According to most experts, a substantial buffer will mean saving between £400 to £800. Meaning that this amount of money should be available in physical cash and stored around the house. For most breadwinners, this amount will be sufficient to last for around two weeks.
Storing an emergency fund
An individual should first look to save money for emergency cash or the buffer and then for the emergency fund. Experts state that the emergency fund should be stored in various places but very rarely as physical cash. The options one has when it comes to storing the emergency funds are:
- Depositing it in a savings account that provides a higher interest rate.
- Obtain a prepaid debit card through which cash can be paid without needing physical cash.
- Create an account on a payment gateway application like PayPal for contactless transactions.
Be it emergency cash for a shorter period or emergency funds, aiming to be financially stable during a trying time is an important goal. Therefore, saving for an emergency should be a priority rather than an afterthought.
