What is an emergency fund and why is it important?
How to build an emergency fund
Whether you rent, own your home, have a family or live alone, an emergency fund is essential for everyone. This funding is different from your bank account and any other savings you may have. Put simply, an emergency fund is for when life throws you a curveball, leaving you with unexpected expenses that your usual income simply cannot cover.
Need help getting started? Here we’ve pulled together everything you need to know about building an emergency fund - what it is, where to keep it and how much you need.
What is an emergency fund?
An emergency fund is money set aside specifically for emergency expenses. These are usually unplanned (and unwelcome) circumstances - for example, a broken boiler, a blown car engine or a leaking roof. An emergency fund is vital for keeping your personal finances healthy, should an emergency arise.
Your emergency fund can also provide a much-needed lifeline if you’re ever unfortunate enough to suffer a loss of income. Whether it’s losing your job or developing an illness, having those funds aside means there’s one less thing to worry about while you get back on your feet.
What should an emergency fund cover?
An emergency fund should only be used as a safety net to cover essential costs. When making a judgement on whether to use your emergency money, try to prioritise the below needs if your available income falls short:
- Utilities and essential bills
It’s important to set yourself some rules as to what the funds can and cannot be used for. This will help you avoid dipping into your savings too frequently, therefore finding yourself short-changed when faced with a genuine emergency. For example, avoid dipping into an emergency fund for non-essential costs like holidays, gifts or luxury items.
Should I have an emergency fund?
Yes! You can’t predict what’s going to happen in the future, so we recommend everyone has an emergency fund set aside for a rainy day. Even if you don’t need to use it for another ten years, we guarantee you’ll be happy it’s there when the unexpected happens.
Where should I keep my emergency fund?
Stashing your emergency fund in a savings account not only keeps it safe, but you’ll also earn interest on the money saved. Ideally, you should have a flexible savings account that encourages regular deposits, whilst also allowing access to the funds when you need them.
For these reasons, either a Cash ISA or an Everyday Saver could be a good option. However, bear in mind you can only open one ISA per tax year. If you’ve already opened an ISA this year, then an Everyday Saver is the feasible option.
If you think you’ll be too tempted to dip in and out of your savings with such an easily accessible account, a Regular Saver account may be a better option. Our Regular Saver is designed for monthly deposits and allows for one withdrawal per year. This means your money is available to you when you need it, but you won’t be able to make small, non-essential withdrawals throughout the year.
Is an emergency fund different from savings?
Your emergency fund should be kept completely separate from any other savings you have. This way you’ll know exactly how much money you’ve set aside and will be less likely to use your emergency savings in a non-emergency situation.
How much emergency fund should I have?
How much of an emergency fund you should have depends on your situation. Most financial experts recommend having at least 3 months’ worth of expenses in your emergency fund.
Three months’ should generally be enough if the following applies to you:
- You don’t have a lot of debt to pay off
- Your cost of living is fairly low
- You have a stable job
- Your job/skill set is ‘in-demand’, so it would be easier to find another if needed
- You don’t have children or dependents relying on your income
- You have a partner or family member you can rely on for financial assistance
However, if the following describes you better, then at least six months’ worth of expenses is recommended:
- You have a high cost of living
- It would be more difficult to find a like-for-like job if you lost your current one
- You have a mortgage and home maintenance costs to cover (older homes in particular can inflate this expense)
- Your job isn’t particularly stable (eg, seasonal work, contractors, artists)
- You have children or dependants
- You have a medical condition that could prevent you from working
- You do high-risk activities, such as rock climbing
- You don’t have a partner or family member to lean on financially if needed
Emergency Fund Calculator
To work out how much money you should have in your emergency fund, you can use the following calculation.
- Examine your budget and identify which are essential costs (i.e. rent/mortgage, utility bills etc.)
- Make a list of all the essential costs and what their monthly cost is.
- Add up all your essential monthly expenses and multiply by three or six months.
How do you build an emergency fund?
Not many people have a lump sum lying around that they can set aside, so don’t worry if you’re building an emergency fund from scratch. The most important thing is that you start saving!
Saving three or more months' worth of expenses will take a little time, but you can find some helpful savings hacks in our ‘best ways to save money’ guide. Additionally, here we have a few tips that can help put you on the right track.
1. Set small goals first
Rather than setting yourself one large savings goal (i.e. three months’ worth of expenses), set some smaller goals first. For example, saving two weeks’ worth of expenses first, then four weeks, six weeks and so on. Hitting each of these smaller milestones will help motivate you to achieve the next, making your overall goal feel more achievable.
2. Start with small deposits
It’s crucial not to overstretch your monthly outgoings. Building an emergency fund isn’t about exhausting your income, it’s about feeling financially secure. Settle on an amount you can realistically save by working out how much you need to comfortably live, without compromising essential needs.
Whether it’s £10 or £100, decide on a figure and commit to paying it monthly (or per payday). Start as small as you need to. This will help get you into the habit of saving, making it easier to increase the amount later if your circumstances allow.
3. Don’t over-save
Once you’ve hit your ultimate goal (eg. three months ) you can stop depositing money into that savings account and simply leave it alone. Building an emergency fund isn’t a never-ending saving cycle, it’s designed to help you in an emergency.
If you want to keep the saving habit going, maybe open another savings account for something fun - like your next holiday - and deposit the funds into there instead.
4. Set up a standing order
The best way to save money is to not touch it in the first place. Setting up a regular standing order means your emergency fund can be built without you even lifting a finger. Just try not to check the account too often, as it’ll feel as though it’s building slowly. Instead, leave it to build in the background.
5. Don’t overcompensate with credit
It can be tempting to balance out the loss of disposable cash by using credit cards instead. For example, if you cut back on clothes shopping to save but use a credit card to treat yourself to new shoes, then you haven’t actually saved any money!
Building up unnecessary debt is the last thing that you want to be doing. In the end, it’s likely your emergency fund will go towards paying off that debt further down the line. Whilst you shouldn’t give up everything you enjoy to build your emergency savings, don’t forget how important it is either. For help cutting your daily costs, check out our guide to saving money on your household bills.
How long does it take to build an emergency fund?
Saving for an emergency fund is important, but there is no set timeframe for completing it. Depending on how much you can realistically put aside each month, the process can take a few months or several years. To help you determine a timeline, consider following these steps:
- Work out how much you can save each month. For instance, let's assume you can save £150.
- Determine the total amount needed for your emergency fund. If your essential expenses per month amount to £1,500, then you will need a total of £4,500 in your emergency fund.
- Calculate the time frame required to save the target amount. Saving £150 each month will take you two and a half years to reach your goal of £4,500.