There’s not a lot that Dave Ramsey and I have in common, except that we both talk about money.
He’s an American with a very traditional viewpoint. Loads of the things he suggests to his clients are simply NOT things that will work for business owners in the UK in 2025, which is who I specialise in helping.
But there is one thing we are agreed on, which is what we’re going to cover today… the importance of building an emergency fund. And the foolproof way to do it, that will actually work for you!
So let’s look at why having an emergency fund actually matters, how much to save and how to do it.
When I work with my clients, the first thing we do is to complete a budget planner. You’ll have heard me talk about this before. It’s something I do with every single client – financial planning clients, 1:1 money coaching or mentoring and in the Wealth Action Club.
Literally everyone I work with, it’s always the first question I ask: “have you done the budget planner?”.
And the reason it’s SO important is because we need to be sure that you’ve got a surplus of money each month.
If you don’t have more money coming in than going out, you cannot do any sort of wealth planning. It doesn’t matter whether your focus is on repaying debt, saving for retirement, buying your dream home or anything else. If you are spending more each month than you have coming in, none of that is going to work.
And once you’ve identified the surplus in your budget planner, if you haven’t already got an emergency fund, it’s something I’m going to suggest you do now.
For Dave Ramsey, it’s baby step number one – squirrel away $1,000 (about £750). His reasoning is that if you haven’t got some money in reserve, then when your dog needs to go to the vet or your car needs repairs, you haven’t got any way of paying for those things. You end up putting it on a credit card and if you’ve been trying to dig yourself out of debt, you’re back where you started.
I look at things in a very similar way. And when it comes to your surplus income each month, I’m going to suggest that you think about it within three different categories:
Category 1: Past
This is to do with paying off debt, which might be credit cards and loans or could be the mortgage on your home.
Category 2: Future
This is about retirement planning and paying for that dream holiday or the thing that you really want to do or have, 5 or 10 years from now.
Category 3: Present
And then there’s that bit in the middle, now. Which is where your emergency fund sits.
So… how much do you need in your emergency fund?
Well, if you’re a working person, there should be enough money to pay your bills, your costs and your living expenses for 3 to 6 months. This is pretty much the standard guidelines within the financial advice community (unless you are receiving a pension or have investment income that easily covers all of your costs each month).
BUT when you look at your budget planner and see how much you’re going to spend over 3 to 6 months, it might be that this doesn’t feel like quite enough. Maybe you want to keep a little bit more than that in savings, just because it makes you feel safe. Often people say they’d feel more comfortable if they had £15,000 or £20,000 in their emergency fund (or whatever the number is that feels right for you).
The next thing to consider is that the money needs to be sitting in something that allows you to get hold of it quickly if you need to. A savings account, cash ISA, Premium Bonds, a building society account. A jar of cash on the side in the kitchen.
Ok so seriously, I wouldn’t suggest you keep £20,000 in cash in your house. But the point is, this is NOT money to be locked away. It’s not money to be invested or tied up in anything that’s got great interest but means you can’t access the funds quickly.
And why do we need this emergency fund? Why bother?
Because we need to make sure that if anything unexpected happens, you’ve got the money there to cover it.
Just to be clear, this isn’t money for the big things that come up once a year. For those things, you’d have a separate sinking fund – where you put money away each month to pay for the big annual expenses like Christmas presents, summer holidays, school bus passes or the stuff you know is going to cost a few hundred pounds, like your car insurance.
If you want to pay for things like this in one go when the time comes, a sinking fund is the way to go. You’re setting a bit of money aside every month, for a specific expense down the road. A sinking fund is designed to be spent.
Your emergency fund, on the other hand, is money that is designed not to be spent.
It’s a cushion; a safety net; there to help protect you and your family if and when the unexpected happens.
At this point, people often ask me “ok but do I really need to save the emergency fund? Are there any alternatives?”.
And the answer is yes. There are two other alternatives.
When we work together, we’re probably going to build in a combination of these three things.
Firstly, if you are a business owner, you can build a surplus in your business account, in your owners pay pot. You probably know I use a simplified version of Profit First with my clients (the amazing book by Mike Michalowicz) where I suggest that you keep back some of your profit each month, so that if you go on holiday or have a quiet month, or a client doesn’t pay an invoice on time, you still get paid your regular wage.
If you can have 3 or 6 months’ worth of your salary and dividends tucked away within your business, then having quite as big an emergency fund at home is probably not quite as important.
I mean, you still need money there if your dog needs emergency surgery or your head gasket goes or your boiler blows up. But you haven’t got the worry about what happens if you have an accident or are too unwell to work for a while.
Secondly, you can get insurance to fill the gap.
If you’re a teacher, work for the NHS or in other local government roles, there are often really generous sickness and health packages. Six months of full pay and six months of half pay is common. But outside of that, sick pay is quite hard to come across. Many employers don’t offer it these days and if you’re self-employed, it’s definitely not going to happen unless you set up a plan to provide it.
Income protection insurance is a way of boosting your income if you are unable to work BUT – and it’s a big but – the caveat is that you need to be signed off sick and unfit for work, and you need to have no income coming in from work.
Let’s face it, as a business owner, if anything happens and you’re off and you’re unwell, chances are you’ll struggle back before you should because you can’t keep away. You love what you do and you don’t want to sit there watching your business crumble around you. You may well have some residual or recurring income still coming in too, even if it’s not a massive amount.
Insurance could be a way to fill this gap whilst you build up your savings, but it’s important to get the right type of cover to avoid un-necessary tax headaches (so please don’t try to do this without financial advice)
Ultimately, between your emergency fund at home and the slush fund within your business, you need to have enough money to keep you going. The money needs to be accessible, in cash and ideally earning some interest for you while it sits there.
It’s easy to read a blog like this, mentally file it away on your ‘things I’ll get around to sorting out one day’ list and click off to carry with your day.
But the thing with an emergency fund is that you never need it, until you NEED it. And then you’ll curse yourself for not getting around to it and sorting it out when you had the chance.
So if you’d like to find out more about the various ways that we can work together to make this happen, just click the WhatsApp button and we can chat it through!
Until next time,
Claire
P.S. If you want my simplified version of Profit First – head over to my everything page for either a free guide (PDF) or a Walkthrough Masterclass!