Emergency fund
What is an emergency fund?
As the name implies an emergency fund is a fund of money usually held in cash deposit accounts or other liquid assets to pay for any large unexpected items of expenditure. This would be recommended by most financial planners or independent financial advisers as an intrinsic part of any financial planning. Ideally an emergency fund should be set up before any other investments are even considered.
Why is an emergency fund essential?
It should form an essential part of your cash flow management for all of those in the millionaire asset group. It avoids having to liquidate any part of your investment portfolio or other assets or quickly that were designed to be held for the longer term, at a time when it may not be profitable to do so.
How much should be held as an emergency fund?
Unfortunately this is an impossible question to answer specifically without a lot more information. It depends on a persons overall assets, income stream, annual expenditure and attitude to how much money they wish to hold in cash. Bear in mind that money held as cash could be making better returns invested in other assets.
However purely as a rule of thumb 25% of your annual income would be a good starting point – however if you are unsure get independent financial advice and make the decision based on your own circumstances.
What happens once the money has been set up as an emergency fund?
Do not touch it unless you have to. If you do, replace the money in the fund as soon as it is possible to do so without negative impact on your overall finances.
Once it is firmly in place and you are comfortable with the amount start building up a more medium term investment portfolio – again mainly in cash deposit accounts or other relatively safe savings plans such as premium bonds or other national savings.
What happens if my bank or building society goes broke?
Please read the information on our best savings plans page.
Any questions on an emergency fund?
Please call us on 01582 839280 or Email us.
