Emergency funds explained

Emergency situations, such as sudden medical issues, unexpected vehicle breakdowns, and repairs in the home are a fact of life. On this page, we’ll look at what exactly an emergency fund is, the pros and cons, how much emergency savings you may need, and how to build an emergency savings fund.

An emergency fund is a savings pot that can help you cover the costs of a sudden financial emergency, such as significant emergency household costs, losing your job, or some other unexpected expense like a vet bill. Another way to look at an emergency fund is as a safety net in case things go wrong, and it’s also often referred to as a ‘rainy day’ fund.

If you’re reading this, it’s likely that you’re employed and have monthly bills you need to pay each month. However, imagine if you suddenly lost your job, or needed to have your roof repaired because of a leak. You’d still have to pay your bills and potentially cover the cost of an important repair.

That’s exactly why you might need an emergency fund. Having a pot of cash set aside to pay for large, unexpected expenses or to cover your bills between jobs will take the pressure off and avoid the need for credit cards or debt-accumulating loans.

It can help to clarify what you consider to be an emergency. Having this set out before you start building an emergency savings fund will help reduce the temptation of dipping into your emergency savings to pay for everyday expenses. Examples of large, unexpected expenses where an emergency fund would prove useful could include:

• Home appliance repair/replacement

• Major car repairs and breakdowns

• Unemployment

• Large vet bills

• Home repairs (e.g. leaking roof, broken windows, damaged guttering)

• Broken or misplaced devices, such as your phone or laptop

An emergency fund isn’t meant for things like forgotten birthday presents or spontaneous holidays; it’s meant to act as a needed cash reserve in times of crisis.

Financial experts think you should have at least three months’ worth of essential outgoings, or three months’ salary, stashed away as a baseline for your emergency fund. However, there’s no one answer to the question, “How much should an emergency fund be?” The best emergency fund amount for you will depend on a few variables.

These include:

• Your total household expenses

• The number of people in your household and their contributions

• The income security of your household

Let’s say your total monthly household expenses (including any food, rent, or mortgage payments) equate to £1,500. Following the three-month guideline, you should aim to have at least £4,500 saved in your emergency fund, as this would cover your bills for that period of time.

However, for the best possible protection against financial shock, experts suggest that six months’ worth of outgoings is better. So, if your monthly expenses are £1,500, you might prefer to put £9,000 in your rainy day fund.

While this information might discourage you, having a small amount of emergency money saved is better than nothing. When deciding how much emergency funds to save, remember that the size of your fund should be realistic, and not restrict your life too much in your current circumstances.

While having an emergency fund does mean that you’ll need to tie up a portion of your money each month, it also means that you’ll be well-prepared in case of financial fallout. We’ve weighed up more of the pros and cons of emergency funds below.

What are the advantages of an emergency fund?

• You’re less likely to need to borrow money with a high-interest loan or credit card, or make difficult financial decisions

• You’ll avoid the stress and panic of trying to find money in an emergency, whether that’s an income emergency or a spending emergency

• If you save more than six months’ worth of expenses, you’ll have extra money that you can either save or use to pay for something else

• In the unfortunate event that you lose your job, you can concentrate on finding a new job without having to rush into something just to pay the bills

What are the disadvantages of an emergency fund?

• You’ll need to save a set amount of money each month

• Allocating money for an emergency fund limits the extra cash you have for other financial goals, like saving for retirement or mortgage payments

• By putting money towards emergency savings instead of investing it, you’re reducing the chance of potentially earning bigger returns on your savings

• You’ll need to choose a savings account that allows you instant access to your emergency cash, and these types of accounts may not typically offer the most competitive interest rates

One way to save for an emergency fund is to simply start with whatever you can manage. Calculate what you’ve spent over the last three months or so to see how much you realistically spend, and this will help to give you an idea of how much you could aim to save.

You can then draw up a budget plan to see how much money you’re able to comfortably save each month.

1. Calculate your expenses

If you opt for the expert-recommended approach, you’ll be aiming to have at least three months’ worth of expenses in your emergency fund. To start, you’ll need to know what your monthly expenses are, and multiply them by three. That will give you the baseline amount to aim for. 

However, keep in mind that there is no one-size-fits-all answer to the question, “how much should you have in emergency funds?” If this amount seems too much for you, you might prefer to aim for a round, attainable figure. When it comes to saving money for an emergency fund, something is generally better than nothing.

2. Start saving

Now that you know how much to have in your emergency fund, and you’ve factored it into your monthly budget, you can begin to set it aside. It often helps savers to have a goal date in mind and milestones to meet.

When deciding how to build an emergency fund, it might help to open a separate savings account that you can store the money safely in. This helps reduce the temptation to spend your emergency money and can even allow you to accumulate some interest on your savings.

However, it’s important that you can get instant access to your cash in the event of an emergency, so make sure that the savings account you choose doesn’t have any restrictions on when you can withdraw money.

It might be a good idea to set up a standing order from your current account to the emergency fund that is taken on the day you get paid. This reduces the risk that you’ll spend the emergency money before you put it in your savings account, and also makes it feel more like another bill that you have already factored into your budget.

Check out our savings tips to help you boost your emergency fund.

3. Be clear about what an emergency is

If you’re building an emergency fund or putting one together with a partner or housemate, it can help to have a clear plan in place (and a certain level of trust if it’s joint emergency savings). In terms of the plan, you should both agree on what exactly amounts to an ‘emergency’ – and therefore when the money in the rainy day savings account can be spent.

If you’re unsure about saving with someone else in a joint savings account, you might be better off saving for yourself or seeking independent financial advice.

4. Maintain your emergency fund

The point of building an emergency fund is that you’re able to protect yourself or your home in any situation. That’s why it’s essential to keep it topped up, even after you’ve already experienced some form of emergency. Unfortunately, you could even find yourself having to deal with more than one financial emergency at the same time.

After you’ve established a plan that sets out your savings strategy, you’ll need to decide where to keep the emergency funds. You might consider a flexible savings account instead of keeping large quantities of cash stuffed under the mattress for security reasons.

When choosing the best savings account for your emergency fund, keep in mind that:

• In the event of an emergency, you’ll need instant access to your money.

• While earning interest is a perk, it’s not essential when it comes to an emergency fund.

• You’ll want to ensure that your money is protected by the FSCS.

• Depending on your impulse control, you might want to keep your emergency fund separate from your daily banking account, so that you can’t easily transfer or spend it.

With all this in mind, an option worth considering for your emergency savings could be an easy access account that allows you to save your money, and access it whenever you might need to.