Money Watch – Personal Finance Blog

Back in April I reported on a survey which suggested that 80% of us do not have enough to live on if we were to lose our jobs.

Having an emergency fund is an important part of financial planning – especially for those who do not have much to save.

There’s a good post at Wise Bread which explains why you should have emergency savings and how much you should try to save:

The basic purpose of an emergency fund is to tide you over if you lose your job. Because money is fungible, the same emergency fund can cover other financial gaps–unexpected expenses, or the unexpected loss of non-job income. It’s there to give you some time to make the necessary adjustments when a gap develops between income and expenses–either get your income back up or cut your expenses down to match whatever income you can manage.

(By the way, I had to look up the word “fungible” – it means freely exchangeable).

They suggest that you work out your minimum monthly expenses, concentrating on the absolute essentials, such as your mortgage, utility bills, council tax etc., ignoring luxuries which would have to be suspended until you found a new job.

Once you’ve worked out your minimum monthly spend, think about how long it would take to get a new job, paying a similar amount to your current position. This is generally where the 3 – 6 months suggestion comes from – it’s likely to take you at least 3 months to find a similar position, if not longer, even if the job market is strong.

And where should you save the money? The article suggests easy access savings accounts, which makes sense, as you might need to get to the money quickly. I’d also say it is worth considering using a cash ISA for the tax benefits, reasonable rates of interest, and because you can generally get your hands on the money reasonably quickly. It’s probably best not to put the money anywhere it hasthe likelihood of losing a substantial amount in the short term, such as in stocks or shares. In times of stockmarket turmoil, jobs can become more unstable, and you wouldn’t want to be faced with the double whammy of losing your job and finding your emergency fund has halved in value.

Of course, emergency funds aren’t just for when you lose your job – it could be needed for repairing your car, replacing a washing machine or getting your heating fixed, but of course, if you do dip into it, you need to be prepared to build it up again.