How to start your emergency fund

What is an emergency fund?

An emergency fund is a sum of money designed to cover unexpected expenses, from replacing your boiler to keeping your household up and running if you can't work due to an accident.

In an ideal world, a sizeable sum should be reserved for urgent situations when you are in a tight spot. You should keep it in a savings account with easy access and a decent interest rate.

It is – or should be – an important part of your money management strategy. 

After all, in some circumstances, having an emergency fund could make the difference between keeping and losing the family home.

How much should you have in your emergency fund?

The general consensus is that your emergency savings fund should be enough to cover at least three months of living expenses, with some experts even advising that you build up enough to cover your household outgoings for six months if possible.

Here’s how to work out how much you need in your emergency fund:

• Add up your essential monthly outgoings, including your rent or mortgage and any bills

• Multiply this figure by three or six depending on the size of your planned emergency fund 

For example, if your monthly outgoings are £2,000, you’ll need £6,000 in your emergency fund to cover your expenses for three months, or £12,000 to cover them for six.

How should you build an emergency fund?

Building an emergency fund can seem like a huge task based on the figures above, especially if you’re keen to enjoy the peace of mind that having six months of expenses saved provides.

But even a small emergency fund can help to get you out of a tight spot if things go wrong, so the most important thing is to get started as soon as you can – and to keep topping it up when you are forced to spend it.

All you have to do is follow these three steps:

• Work out how much spare cash you can contribute to your emergency fund each month. If you don’t have any money to spare, look at where you could cut back – for example, on eating out or subscriptions – to free up some cash to go towards your emergency savings fund. Another option is to examine your household bills and switch to cheaper providers and products where possible, then use the savings to build up your emergency fund without cutting back on goods and services

• Open a savings account that pays a competitive interest rate but offers instant access to your money when needed. As these funds are designed for emergencies only, it’s sensible to keep them separate from your everyday spending money and any other savings you may have

• Set up a monthly Direct Debit from your current account to your emergency fund savings account. As with important payments such as your mortgage or rent, the best time to schedule these outgoings is a few days after your wages go in. That way, you won’t have had time to spend all your earnings, but you won’t end up in the red if there’s a slight delay in receiving your salary. And if there’s any money left at the end of the month, you can always top up your emergency fund again

Emergency fund saving tips

• Making regular small contributions to an emergency savings account is usually easier to commit to than paying in larger amounts from time to time. Moreover, this approach will often allow you to build a larger emergency fund over time

• Once you’ve reached your emergency fund target, reward yourself by using any extra cash to treat yourself or your family – you could even purchase a holiday

• Check that your emergency fund is fit for purpose every few years. Your monthly outgoings may increase over time, meaning your emergency fund target will likewise need a boost

• While having an emergency fund to fall back on when things go wrong is important, it’s even more crucial to clear any costly debts such as credit cards first

Where should you save your emergency fund?

You never know when you will need to dip into your emergency savings, so the best place to save them is in an instant-access savings account. This will enable you to withdraw money immediately rather than having to give notice when you need to access your fund.

With an instant-access account, you are likely to receive a variable interest rate. However, they are more suitable than fixed-rate savings accounts, which generally last for a set length of time, during which you can only make restricted withdrawals (if any). 

While you could use an easy-access cash ISA to house your emergency savings, the disadvantage is that any money you pay in and then take out will still count towards your annual ISA allowance for that year.

Our comprehensive series of guides can help you explore all the various savings options and explain which ones best suit different savings goals.