With the recent crisis beginning to calm and the new world order falling into place, many have started thinking: ‘How much Emergency Fund (EF) do I need in the UK?’, ‘What’s the best way to set set up an Emergency Fund?’ and ‘How do I stop myself just spending the money?’
We all know a career in the arts is never fully secure, but an Emergency Fund is good way to give yourself a sense of security when an unexpected situation comes up. But first we must ask,
What is an ‘Emergency Fund’?
An ‘Emergency Fund’ is a pot of money saved to cover you in the case of an unexpected situation or emergency.
A sad fact of life is that tragedies happen. Your car breaks down. You lose a job. A family member passes or, hypothetically, the world shuts down because of a global pandemic! You need a stock of cash ready so that any unexpected event doesn’t lead to financial ruin.
According to a study done in the USA:
40% of Americans are one $500+ emergency away from financial ruin.
Whilst we have a different culture around business, money and personal finance in the UK, this illustrates the need to be prepared and an EF is a good way to achieve this.
It should be liquid enough for you to be able to access it at a moments notice, but not so easy to access that you tempt yourself to take money from it for a new pair of shoes. Unlike a Holiday or Tax saving pot, an EF is precisely for that: an emergency!
STEP 1: Set a target amount
Now the big question: How much Emergency Fund do I need as an artist in the UK?
Accepted wisdom suggests 3 months of your basic monthly expenses is a good amount to save. Some people recommend 6 months, but you should be aiming to have an EF saved within a year, so 6 months becomes a mammoth task. Some people are comfortable with 1 month, but this is such a small amount that it doesn’t give you the time or amount necessary for a bigger crisis. However, 3 months is a realistically achievable goal that is also a good amount of money.
Remember it is 3 months of your basic expenses, not your overall expenses.
Start by asking yourself: what non-essential payments could I cut during a crisis?
This will give you a ‘bare bones’ number to work with and, in the event of a crisis, this would be how you would have to live your life whilst you sort out your problem.
To work out your amount, you can use the table below:
RENT + BILLS + Average FOOD & TOILETRIES per month = Monthly Average
Monthly Average x 3-months = Target Amount
|AVERAGE MONTH||1 MONTH||3 MONTHS|
|BILLS (Internet, Electricity, Gas, Council Tax, Water)|
|TOTAL||TOTAL||TOTAL x 3|
STEP 2: Set up a new savings pot
- Firstly, you should do this with a separate bank to your personal account to make it harder for you to take from it for trivial purchases.
- Secondly, change the name of the account to ‘Emergency Fund’ rather than keeping it as a random account number. Psychologically, this will put another barrier between you and the money.
- Thirdly, compare the interest from each savings account option to make sure you are getting the best deal. With a new savings pot, the Emergency Fund itself will be generating money for you each month in interest. It won’t be massive, but means the more you put in, the more you get out.
STEP 3: Create a Budget and Timeline
Yes, I know – the B word is back!
If you are a creative with varying levels of employment, finding a few thousand pounds to put in a savings pot isn’t something you can just do, so setting a budget and timeline becomes crucial. It does mean you will need be stricter with yourself and your budget, which is also easier than you think.
For example, if your goal is £2600 then all you need is to save £50 a week for one year: £50 x 52 weeks = £2600
- Set a specific date that you want to have your target goal achieved by. You can then break your goal amount down into monthly and weekly goals.
- Think of small sacrifices you can make: walking instead of getting the bus, buying no new clothes for a bit or making lunches at home every night.
- If the weekly goal is too much then build up to it gradually. Using the earlier example, if £50 a week was too much, consider starting on £30 a week for 4 months, then £50 a week for 4 months, and £70 a week for 4 months after that.
- Treat it as a mandatory line in your budget like any other bill.
Remember: building your EF is an obligation that will help support you if the unexpected happens. The long-term benefit is worth it!
STEP 4: Set up a Standing Order each week or month for the amount you have set.
Having a Standing Order every week keeps payments automatic, thus lowering the inclination to keep the money in your current account for one week more. This also makes it easy to make your transfer if your EF is with a different bank.
Here are some handy questions that can help you make extra cash to top up your EF or cut down on expenses.
- What are the non-essential items in my life?
Eating out, going out a lot, entertainment.
- Are there cheaper alternatives to my current shopping?
Store brand products, shopping at a cheaper supermarket or local market.
- When was the last time I contacted my mobile phone provider?
If it’s been awhile, it might be worth asking for a cheaper deal that matches your needs, especially if you don’t use all the minutes, texts or data.
- When does my rental contract run out? Am I happy with how much I pay for where I live?
A drastic step but something to bear in mind. Rent is the biggest expense and if you could be happy downsizing to a cheaper place then you should consider it.
- Do I have a skill I can use to make a bit of money as a ‘side hussle’?
Speaking a foreign language, playing an instrument, being good at baking – if you know how to do it somebody will pay for it.
- What things do I have that someone else might find useful?
Give your house the Marie Kondo treatment and any clothes, books or equipment you don’t need can be sold.
- Will I be getting any extra cash in the near future?
Tax Rebate, birthday money from your Nan or money you were not expecting to have can go straight into your EF.
- Can I turn this into a game?
If you are the competitive sort, you could set up a game with a friend to see who can reach their EF savings goal first. Or smaller goals, like first to £1000. Loser makes dinner for the winner!
A gift to yourself
Remember that saving an Emergency Fund is not a punishment but a gift you are giving yourself. As a result of having an Emergency Fund set up for UK use you will get a sense of security and safety that. In the long-term, this will make you feel happier and able to put more energy into your work and yourself. There is no better feeling than knowing that if unexpected or scary things happen, you are safe and able to protect yourself.
Having an Emergency Fund is the first step to becoming good with money and being financially responsible. Creating and Emergency Fund will give you the freedom to take bigger risks in your life or career that you couldn’t do otherwise.
Did you enjoy this article? Why not also check out:
– What is Tax Anyway…and Do I Have to Pay it?
– Mental Health in ‘the Industry’
– Post Lockdown – Let’s Niche!