“Prepare for the worst. Plan for the best.” ~ Lorrin L. Lee

In life it is that which we are not prepared for that can throw us off of our path to success and happiness. Simply preparing for this can not only help when the worst does happen but even though we may never be fully prepared for anything, preparing in the ways we are able to, will build a sense of security.

Throughout my childhood it was those occasions where something unexpected happened that created tension. Most of these issues demanded immediate finances which luckily my parents always had. Even though my parents were able to remedy the issues without resorting to credit they never set aside a targetted fund for these problems which meant that they felt as though they were eating away at their hard-earned savings. This is where an emergency fund can be utilised.

Most personal finance websites preach the importance of having an emergency fund and I am also a firm believer in preparing for the worst. By targetting one of your savings accounts solely for emergencies you will feel more secure. There are two questions that come to mind when setting up your emergency fund:

1) How much should be in my emergency fund?

2) What warrants an emergency?

Nobody has the correct answer as each emergency fund should be personalised to your situation. Over the years I have used several techniques:

1) I started with a fund of £2000 for any difficulties I might come across

2) I then decided that using data on my expenses that I might try to have the equivalent of 6 months worth of expenses

3) This then increased to 12 months of essential expenses

4) Currently I am using the unemployment rate in England (8%) to dictate that my emergency fund must have 8 months of essential expenses

I’ve stuck with technique (4) for the longest as it enabled me to free up money for my other medium- and long-term goals such as saving for a deposit on a house.

Also, as an unmarried graduate with no dependents I realised that my emergency fund need only cover my essential expenses for the present.

The second question is more difficult to answer and again requires your personal situation for a suitable answer. For myself I count the following as ‘emergencies’:

1) A broken boiler/dodgy electrics – anything that will endanger my health or will take away one of my basic needs (hot water for showers)

2) Unexpected redundancy – should my company need to release me from my job I need to have a few months expenses to cover my rent, food and bills until I have another job lined up

3) Inability to work through personal injury – this is perhaps the biggest emergency that may require more than 8 months of expenses however I know that should this happen to me that my other savings are liquid enough to cover should I need to

An emergency fund requires continual evaluation. A change in your personal circumstances such as marriage or children or redundancy will force you to look at your emergency fund more critically but this is not the only time when you should be evaluating it. I evaluate my emergency fund at least once a year to ensure that it correlates with my current spending levels and my living situation.