Tips for building an emergency fund

[SnowShod]

Looking for tips to help build up an emergency fund. I'm a higer earner earning 6 figues, but I struggle with budgeting/saving for the medium term.

I put most of my spare money in a pension, and live quite frugally day-to-day. - for example I have a cheap food shop, no subscriptions, no beauty treatments, rarely buy clothes. But my one vice is going on holiday.

I'm wondering what I can do to help me build up an emergency fund. For example, what % of my salary should I look to put away every month? Should I open a separate account for this? How can I stop myself dipping into this account when I want things?

My main issue is a mental one and making large purchases, rather than an issue of cash flow. I can be a bit weak, for example I budget X amount for something, but end up spending more as I want to spoil myself or others and I have the money available. However, this is detrimental to my medium-term savings goals. I've seen apps recommend like YNAB but it feels like a lot of effort (maybe it's worth it?) - it also feels scary to be that rigid (but maybe that's what I need). Any other tips or quick fixes?

Longer info for more context: In the past 6/7 years my salary massively increased after completing a course and changing career. This enabled me to pay off some debt and save for a house deposit - finally buying my first property 3 years ago. In the past, my emergency fund was the money I put away to save for a house deposit (I actually lost my job, used some of the deposit savings to tide me over, then rebuilt the deposit once employed again). After I bought my house, I massively upped my pension contributions.

In terms of savings, I reliably put away £600 per month from my wages - but I use this to go on holiday with friends or my boyfriend. So I never build a huge pot. I also get quarterly bonuses, which I put into an ISA. However, I am struggling to retain large amounts of bonus money over time as I pay for various experiences and larger purchases. For example, I bought a newer car (costing approx £12000) 2 years ago as mine was 20 years old and on it's way out. Last year I surprised my boyfriend with a long weekend away. This year I'm taking my mum on a luxury holiday (approx £10,000 for both of us) to celebrate big birthdays - she hasn't been abroad for over 20 years.

Obviously, the easy answer is stop buying things and going on holiday. However, I guess I'm looking for balance - I don't want to be in a position where I do nothing because I'm always saving, but I also don't want to be in a position where I lose my job and have no money to fall back on. Is there a strategy for budgeting where I can feel like I'm enjoying things now, but also ensuring I'm secure for the future? I feel like my pension is sorted.

How old are you?

If you can draw down from your pension that might give you something for emergencies.

Too young to drawn down. Early 40s.

Transfer money into savings as soon as you get paid. Treat it like another bill.

6 months’ expenses is the rule of thumb especially if your job is insecure, but you could also start with smaller more discrete goals like if a certain thing broke (washing machine, car, roof, boiler etc) how much it would cost to fix/replace.

You don’t need an app but you do need a budget. Write down how much you’re spending on wants, needs and savings (including pensions). Decide if the balance looks right to you. Write down longer term savings you will need to do and by when eg if your new car lasts you 15 years how much you’ll need to save each year to be ready to buy another one at that point.

Do you have income protection insurance, critical illness etc?

Thank you for your reply. Is there a "rule of thumb" for % I should try to save each month, for example out of disposable income or total net pay?

I don't have critical illness or income protection. It just seemed so expensive- I know it's an investment/insurance. I also don't know much about it. For example, i worry whether they would really pay out and how much it would pay. Maybe I should read up and seriously consider buying it.

I’ve seen 50% needs, 30% wants, 20% savings/ investments/debt payments as a rule of thumb (out of net pay) - but of course might need adjusting depending on how much you spend on needs.

They pay out if you have an insured event like any insurance, but depends what kinds of emergencies you are concerned about.

You should aim to have 3-6 months of essential costs saved as an emergency fund. Work out what that would be for you and what is a realistic timeframe to save it and then put that aside each month.

Wow, OP, it sounds like you're making a lot of money, but also spending it.

I've just read I will teach you to be rich by Ramit Sethi. It's American, but I didn't actually find this too distracting - it focusses on defining what a rich life is to you, and spending on that (but saving on things that don't matter to you). I also enjoyed Meaningful Money by Pete Matthew, which is UK-based.

I think you asked about percentages, there are some older books that suggest 50% needs, 20% savings, and 30% wants, but the right ratios probably vary throughout someone's life, and depending on what they've done previously.

Is there a "rule of thumb" for % I should try to save each month, for example out of disposable income or total net pay

Not really as there's so many variables, although the suggested 20% of income (in conjunction with 50% on essentials and 30% on non essentials is a good place to start, but might not be achievable for everyone)

Stability of income
Amount of essential expenditure
Other protection in place - insurances and also whether you have a partner who could pay the bills if you lost your income
How much spare money you have - no point saving for an emergency that might never happen if it stops you paying for essentials or any day to day leisure spending.
Whether you have sinking funds for annual and irregular expenditure on top of the 'emergency fund'. Many people consider any non routine expenditure as 'an emergency/unexpected' whereas others will save separately for car repairs, white goods replacement etc and their emergency fund is genuinely spare money.
Your long term aspirations for paying off a mortgage, retiring, downsizing, travelling etc etc in terms of how much money this will need.

The financial flow chart will help in terms of size of emergency fund at different life stages and other spending/saving/investment decisions:

ukpersonal.finance/flowchart/

I think this is right you're making a lot of money, but spending it. I perhaps I have been delusional about my spending because: (1) I do put a lot in my pension; and (2) my monthly salary feels "normal" due to my level of pension contribution.

However, when I get my quarterly bonuses (which do vary in amount, but make up a large chunk of my pay) I tend to waste/spend them on big things because I almost see it as free money, and reassure myself I'm being "frugal" month by month.

This is why I think it's a new mentality I need to develop. Perhaps with a strategy focused on truely saving as much as my bonuses that I can. The bonus aspect of my salary is the newest part, and has increased considerably even in the past 4 years. So I think I'm just not used to managing it.

op, you should do what i do, save half your bonus and spend the rest as completely free guiltless money. then you can get a nice big purchase you've been after but also bump up your savings nicely at the same time.

i think its interesting that you're putting a lot into your pension when you haven't got an emergency fund yet. what if you encounter a real emergency in a month and need the money you've earnt? it won't do much for you if locked away in a pension you cant access for 17 years! if i was you i would reduce my pension contribution to the minimum to get employer match, but NOT spend any of the extra money you get in your pay - put it straight in the emergency fund. then when you have a suitable emergency fund, increase your pension contributions back up and start trickling smaller amounts into your savings.

How much do you actually earn OP?
What percentage do you pay into your pension each month?

£600 pcm for savings doesn’t seem that much if you’re earning over 100k. Obviously it depends on your outgoings but it does seem you’re spending a lot and I suspect it’s because you think you’re frugal (and maya be so on a day-to-day basis) but then you spend very large amounts on other things. 10k is a lot for a holiday for two imho, especially if you don’t have much in savings.

BTW I’m late 40s and have just taken out income protection which covers me for ASU and it’s £45 pcm to pay out 2k per month for a year in any of those eventualities.

I like the idea of 50% saving the bonus 50% spending guilt free. I think I need a similar strategy.

Re reducing pension contributions to build up an emergency fund: I have thought about this, but I'm in the 60% tax trap, so I'm very hesitant to reduce my pension contributions and give extra money to the government. It feels "expensive" to save money way.

Part of my delusion is if I get laid off I will get at least 3 months pay in lieu of notice, plus some additional for years of service. So I hope that will tide me over until I find a new job. But it wouldn't cover every circumstance. Also, I would like to pay down the mortgage before my fix ends in a few years. So again, this wouldn't cover the scenario- this is just to share more of my thinking and the contradictions in my own mind/behaviour.

You sound like my DH and I, we never managed to have any savings despite very high earnings until we retired. All our money went on holidays and pension contributions.

Thank you for this really clear advice. I'm going to take some time to digest what you've said.

My salary varies and has different components. A monthly wage, an annual cash bonus and quarterly bonuses from shares based on my performance.

Last tax year I earned £120k, this tax year I will earn £150k, next tax year it will drop to £130k. This is because a large part of my salary is shares, and because a sign-on bonus I received is ending in the middle of this year. But I also got promoted recently - which explains the jump from last year to this year.

I'm putting £60k in my pension each year. My employer contributes about £7k, so I'm paying £53k from my salary.

So this after tax and pension, I get approx £2700 every month in salary, which I pay my main bills from, and put away £600 into a savings account for holidays/car insurance/home insurance.

Additionally I get lump sums every quarter (it's difficult to put money from the bonus into my pension, so I just do it from my regular monthly wage). It is these lump sums that I've noticed I'm wasting/spending as described in my OP.

It sounds like it worked out for you in the end ❤

BusyPoster · Today 17:42
You sound like my DH and I, we never managed to have any savings despite very high earnings until we retired. All our money went on holidays and pension contributions.
It sounds like it worked out for you in the end ❤

It really did, by paying extra into pensions we couldn’t touch the money and also paid less tax. Then once we were 55 (probably 57 fir you) we had access to a lot of money tax free. We did try saving lots of times but every time we got to a certain amount we booked another holiday. Bonuses also went entirely on holidays.

That’s complicated! Have you thought about seeing a financial advisor? You’re saving an enormous amount in your pension and I do understand the 60 % tax issue but it’s still very high. My DH earns about 180k (probably more with bonus and he is paying in around 36k annually and the projection is still very good.

I think you need to get YNAB. You sound wealth but I’d consider you very precarious. You’ve no savings for a car, washing machine or emergency repair to your roof. I’d personally stop the pension payments till I had 6 months savings in cash. However, I can see your tax point so I’d consider just saving my bonuses till I’d got to that point. And I’d save 100% of them till I got to that point.

Sorry if I’ve missed this but do you have any savings now?

It's a tempremental thing OP. You're just not frightened enough by what might happen. One of nature's optimists.

Unlike me. I always think that whatever I haven't planned for, will happen.

Have you had a difficult, poor even, youth? IME people who act like you are for ever treating themselves because they weren't able to have treats for a long time.

You need to start worrying.

What would happen if you were ill long term ?
( You need a tax free Income protection plan, usually based on max. 60-65% of your income and which will pay out if you are 'unable to do your OWN job'. )

What would happen if you lost your job? Company folded, taken over etc? Or you're made redundant, sacked in your 50s? Have you got a big enough fund to ride out min. 6 months to 1 year with no income?

Have you got an upto date quote of how much your pension fund would give you if you couldn't contribute any more? At age 60? 65? 70? Would it be enough to cover bills, mortgage, rent etc?

Be aware of the risks in having part of your income in your company shares. If it gets into trouble you'll be hit by a double whammy - no job, worthless savings.

Be aware that as you get older ie in less than 10 years time, 50+ it will be more and more difficult to get a new job. You could be unemployed or earning minimum wage for 10-15 years.

I'm sure you could think of more scenarios to frighten yourself.

I guess you also don't believe you'll ever die so haven't made a will?

I tired to see a financial advisor a while back when I got my first big job, I was earning less (about 70k in total) but they didn't seem interested in advising me. Which put me off. They were probing to see if there was anything they could sell me (e.g. do I have children? Do I plan to have children? how many stocks and shares do I have?) and when they realised there was nothing (I'm not able to have children) they just told me to put as much as I can in a pension, then start filling up the ISA. The whole experience put me off, but I could try again with a different company.

I have about £12k in savings now. So not a lot considering. Obviously that will help if the boiler breaks, but it won't help me pay off a lump sum of the mortgage or if I'm made redundant tomorrow. I also feel like I'm not in the "savings mindset": that's just some of the recent lump sums I've stuck in my ISA. I want to hold onto the £12k and add to it. I want a strategy, not just a haphazard approach (which is what I'm feeling now).

Would you consider using half of each bonus to pay a chunk of your mortgage?

How many years are left on your mortgage?

Do you have redundancy cover?