IF one of your New Year’s resolutions is to get your finances ship shape, then you need to consider building an emergency fund.
Balancing the books is difficult if your outgoings tend to swallow up all of your income.
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But, without some money put aside you could find yourself in serious trouble if you need to make a big payment.
An emergency fund can lessen the shock of needing to find money at short notice, especially as the cost of living crisis rages on.
But how do you go about building up savings if you’re skint at the end of every month?
We spoke to Michael Royce, senior policy manager at the Money and Pensions Service, which offers free help and guidance on starting an emergency savings pot via MoneyHelper.org.uk.
Why is an emergency fund important?
An emergency savings fund is a very useful safety net to deal with sudden unexpected costs, like a car repair or a broken washing machine.
It boosts your financial security because when those costs suddenly hit, you can draw on the fund instead of having to find extra cash elsewhere.
Michael said: “Having an emergency fund also means you’re less likely to have to borrow when this happens.
“Credit is a very useful tool when used correctly. But if you don’t have savings you might rush into a decision without doing your research and picking the right product.”
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How much should someone save?
Recent Money and Pension Service research shows a quarter of us have less than £100 put away, while one in six have nothing at all.
Yet, Michael believes even building up a small amount could make all the difference.
He says: “Saving smaller, regular amounts is often more effective than saving larger amounts now and again. It gets you into the savings habit and you’re not overcommitting.
“It also lets you budget your spending from week to week or month to month more effectively.”
What are the best ways to build up an emergency fund?
A good place to start is getting into the savings habit. By saving regularly, you’ll soon be able to build a pot.
This means looking at all your outgoings and being realistic about what you can put away.
Setting up a direct debit or standing order with a different account, so they money isn’t sitting alongside their normal household budget, is one of the easiest ways to get saving.
You could speak to your employer about a workplace savings scheme.
This could see part of your pay sent directly to a savings account, so you get used to getting the same pay in your normal account every month.
Michael says: “The money you put into your emergency fund will be available whenever you need it.”
Can you get government help to save?
Check if you’re eligible for the government’s Help to Save scheme, which is aimed at people on a low income.
Over four years, you receive two bonuses from the government based on your highest balance during each two-year period.
If you can save the maximum £50 a month for two years, you’ll get £600 added to your account for free. Keep saving £50 for another two years and you’ll get another £600 bonus.
This means you’ll have saved £2,400, and get £1,200 in bonus money, all of which you can earn interest on.
As for where to save, Michael points out: “There are lots of different accounts and products for savings that might also help, some of which might pay interest on the money you have.”
What should you do before you start an emergency fund?
An emergency fund should reduce your stress levels, and to make sure you feel positive about your savings plan the first thing you should do is set a savings target.
As Michael explains: “By working towards this, you’ll get the benefit of feeling like you’re making progress, with a completion date continually getting closer.
“You then need to go through your budget and check that you can realistically afford the amount you’re aiming to put away.”
“If you can’t, you might need to reduce either your outgoings or the amount you’re trying to save.”
What if you have debts?
Many potential savers question whether they can afford to save if they owe money on credit cards or loans. But Michael doesn’t see debt as a barrier to saving.
He said: “Instead, consider whether it’ll save you money and whether paying something off will leave you needing to borrow it back quickly.
“Everyone’s circumstances are different, so take some time to consider the range of free help and guidance that’s available before making the decision that works for you.”
What shouldn’t you do when saving up an emergency fund?
Regular saving is a commitment, and shouldn’t be rushed into unprepared.
“People who put aside larger amounts just occasionally tend to build up lower savings pots than those who save smaller amounts regularly,” Michael said.
“You need to make sure you’re saving an amount you can afford without having to repeatedly dip into it to meet day-to-day expenses.”
Find out what payments to expect as support from the government this year by reading our round-up.
