Home > Staying Debt Free > The Importance of Creating an Emergency Savings Fund

The Importance of Creating an Emergency Savings Fund

By: Garry Crystal - Updated: 19 Oct 2012 | comments*Discuss
Emergency Savings Fund Credit Cards Isa

People who use credit cards in an emergency are wasting large amounts of money in interest payments. Creating an emergency savings fund is the wiser option to stop the lenders from increasing their profits.

What’s the Point of an Emergency Savings Fund?

Many people do not even consider the emergencies that can occur throughout life. Unemployment can hit anyone at anytime and there are no guarantees of a secure job for life anymore. Sickness, redundancy and accidents can result in a period of unemployment with a decreased income. If unemployment does occur it will mean paying bills and debts from a reduced income. Unemployment benefit in the UK is incredibly low and for most people it is nowhere near enough to pay all monthly bills and debts. If unemployment does occur an emergency savings fund will be a life saver.

Using Credit Cards in an Emergency

Credit cards can come in handy if a financial emergency occurs. But using a credit card or even taking a loan out to pay for big outlays can be financially damaging. Paying by credit card means paying interest charges until the debt has been cleared. Some people will use their credit card to withdraw cash in an emergency situation and this can be even more financially damaging. A cash withdrawal using a credit card will mean interest starts the moment the cash is withdrawn. There is no interest free period in which to repay cash taken from a credit card account.

Why Cash is Always Better than Credit

If possible, it is does make financial sense to pay by cash instead of credit. The added interest will simply mean that the price of goods and services will be inflated when using credit. If using credit in an emergency is the only option then clearing the balance during the interest free period should be a priority. For large families a broken washing machine can seem like an emergency. Paying for this sort of item with credit will mean paying much more than the price advertised in the shop. Interest free options should be considered if an emergency savings fund is not available.

The Basic Emergency Savings Fund

Financial advisors claim that enough money for three to six month’s worth of living expenses is a good emergency savings fund. Six month’s worth of living expenses can seem like a lot to save for families on a budget. But building this fund up does not have to mean large financial sacrifices. Putting in what can be afforded will be a start, and the fund can be added to when there is any spare cash. The biggest obstacle will be combating the temptation to dip into the fund for non emergency purposes.

Resisting the Impulse to Spend Savings

Those who may find it hard to resist dipping into their emergency savings fund do have an option. There are savings accounts where the customer is required to give notice before money can be withdrawn. Giving notice does sound as if it defeats the purpose of an emergency savings fund. But there are some savings accounts that come with a 30 days notice period. If unemployment were to occur the notice period would be similar to receiving the next month’s wages after the last salary payment. Remember, notice required savings accounts do pay higher interest rates than normal bank accounts.

Consider a Cash ISA for Emergency Savings

An Individual Savings Account (ISA) is another option that can be used as an emergency savings fund. Interest on an Individual Savings Account is paid on the money saved and it is tax free. There is a set level of how much can be paid into a cash ISA each tax year. Using a fixed rate ISA will mean that interest is fixed at a particular level for a certain period of time. Withdrawals are not permitted during this fixed rate period, which can be good for those who are tempted to dip into their savings. An instant access ISA will be a better option for those who wish to have withdrawal flexibility.

For most people, creating an adequate emergency fund will take around three years. Those considering high interest savings accounts and ISAs should shop around for the best interest rates available. Emergency savings funds can be a life saver in the future and will help to beat the lenders if financial hard times do occur.

Website Design, Illustration, Hosting and SEO

If you are looking to increase brand awareness, generate web enquiries and/or generate online sales In Studio Digital will create an affordable, mobile friendly, secure website - check out In Studio Digital.

Based in the UK, skilled in WordPress, web design, ecommerce and illustration, they will build your site quickly, host it on a high performance server, and make it SEO friendly. Prices start at £399.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

(never shown)
(never shown)
(never shown)
(never shown)
Enter word: