Are You Ignoring Emergency Corpus? You are Risking Your Finances

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No matter how long you have been basking in financial stability, you should brace yourself for contingencies. Emergencies do not inform before knocking at your door. It is important to save money while you have good amount of cash coming in so that you can meet unexpected expenses when you face cash shortfalls. The significant reason for relying on emergency corpus is unemployment.

You may lose your job for one reason and the other. How will you manage your expenses unless you land a new job? What if an unexpected expenditure crops up? Loans can be an additional benefit to tide you over, but direct lenders will not provide you with as many options as they provide to borrowers with full-time employment. Further, if you get loans for unemployed successfully, it may not be enough to keep the wolf from the door.

Many people get confused with both rainy day funds and emergency cushion. The former is an amount of money set aside to meet small expenses outside of your recurring expenses, for instance, a car repair, home repair etc. Your car, laptop and a tumble dryer can conk down at any time. Your rainy day funds will help you meet expenses that appear out of nowhere.

However, the role of emergency cushion is a bit different from rainy day funds. Emergency cushion seems to target big expenses. The size of rainy day funds will be smaller than that of the emergency cushion because the former does not include your living cost. The latter comes into the role when life throws a curveball. What if you lose your job? What if you catch a major illness? What if you part ways from your partner? This is why it is recommended that you should have it six-months worth of your living cost. The idea to create emergency corpus is to handle surprise situations without dipping into funds for your regular expenses such as utility bills, childcare, mortgage, rent, groceries.

How much to contribute to both types of saving funds

It is better if you manage to manage both reservoirs. Your savings plan will be more concrete if you know how much exactly you have to set aside without struggling to pay for regular expenses. Since the aim of rainy day funds is to help you tide over small unexpected expenses, experts suggest that you should set aside at least £500 and it should be twice for your emergency funds.

Of course, putting away £1500 every month is not that easy for everyone. You may be on low wages. Try to set aside on basis of your cash inflows. Even a small amount of savings will cushion the blow.

It is not necessary that you manage both types of funds separately. If your income is not large, creating one savings account will be a better idea. Even if you have very little savings during emergency, you could avoid taking on the burden of debt.

How to put aside

No matter how much you earn, you easily set aside money every month. Here is the best way to set aside money for a rainy day:

  • Try to link your savings account so that a portion of your paycheque directly goes to it every month.
  • Use savings app and set up an auto-transfer mode. The rest task your app will do.
  • Cut down on discretionary expenses. Use apps to regulate your spending habits. They will notify you as you get closer to the set limit.

Your emergency funds should be readily available. It means you can access funds as and when you require without paying any fees. Loans should be an alternative when your savings fall short. For instance, if you need £2,000 and your savings account has £1,300, you can take out £700 with a direct lender. A debt of £700 will be more manageable than a debt of £2,000. Therefore, it is essential that you build an emergency cushion. Make sure that you do not dip into them for your discretionary expenses.

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