According to recent research, millions of people in the UK have less than £100 in the bank. Low incomes, rising costs of living, and a whole host of other problems contribute to those figures. But even if you have more than the 16 million or so people so close to financial ruin, are you really ready for anything?
If you are anything like the average person, the answer is – probably not. Another piece of research from homeless charity Shelter reveals a big problem. More than 8 million people are only one paycheck away from being unable to pay their mortgage or rent. If they were to lose their jobs tomorrow, disaster awaits – and it could happen to you.
The uncomfortable truth
It doesn’t take much for an emergency situation to occur in any household. An expensive car breakdown, an injury, or even a disaster in the home could happen at any time. And if it leaves you with enormous expenses or an inability to earn money, what are you going to do? Payday loans are an option, of course. But unless you can pay them back quickly they will end up costing you more than you bargained for. The answer lies in creating a robust emergency fund – so, here’s some tips on how to start one.
The long road ahead
When you are living from paycheck to paycheck, it can be hard to see the wood for the trees. How can you possibly save money when all your incomings are going out straight away? But, the facts are that a healthy emergency fund should last you for a minimum of six months with no other earnings. And while that seems a lot, it is achievable.
The first step in the process is to work out your incomings, and then work on your outgoings. Write everything down, including rent or mortgage, food bills, energy use and contracted services. You should also consider the costs of clothing, cosmetics, and clubs and activities for the kids. Make sure you include every last thing that you spend money on – even things like subscriptions which only cost a few quid each year.
Next, take a long, hard look at those figures. Is there any way you can cut your costs? Perhaps you could reduce your TV subscriptions, or stop buying the most expensive foods. Are there bank charges hitting you, which you could cut immediately by being more organised with your finances? Switching your gas and electric companies can help a lot, too. If you are out of contract, you could save yourself up to £300 every year. There are opportunities to scale back for everyone, no matter how little money you think you have.
The big picture
All those little expenses you are saving might not look much at first. But when you start adding them up, you will surprise yourself with how quickly the amount shoots upwards. And don’t forget, these are monthly costs. Multiply them by twelve to give you annual savings, and it will show you just how much money you are wasting.
There are a lot of tools out there that can help you plan and stick to a budget. Use them – we like YNAB, but there are plenty of others to choose from. Check reviews of the app or software you use, and you will see that some people are making significant progress. Even to the extent where they are no longer living from paycheck to paycheck.
Target your debts
Next, take a look at all of your consumer debts. These tend to be expensive, so the sooner you deal with them, the better. Focus on paying a certain amount of money back each month, without fail. And, when the debt is cleared, you will have even more money to put into your savings.
Save, save, save
Finally, it’s time to start saving. Put everything you can into a high-interest savings account, and be relentless every month. You can live off your budget – you have already proved it. And every last penny that you save will help you start to build a less risky future. Sure, things will crop up every now and again, and you will have to take the hit. But, the point is, you have the capability to take that hit. It won’t have any effect on your spending power, and you and your family will feel more secure as a result.
We hope this has helped you understand the importance of creating a healthy emergency fund. Good luck!