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How to build an emergency fund

The best way to deal with the unexpected is to be prepared for everything. But how can you plan for what you don’t know - and how much do you need to save?

Having a pot of money that’s just for emergencies can mean that if something unexpected happens, like your car breaking down or having to move house suddenly, you’ve got the money to get you through without going into debt. But it can be tough to figure out how much you should have in your emergency fund, how to build up your savings, where to keep them and what to do if you need to dip in.

What is an emergency fund?

An emergency fund is simply money that you’ve set aside to help you deal with any unexpected costs that you wouldn’t be able to pay for with your regular income.

Here are a few examples of situations where you’d likely be grateful of an emergency fund:

  • Losing your job or main source of income and having bills and rent/mortgage to pay
  • Having to move out of your home on short notice
  • Your car breaking down and needing repairs
  • An essential home appliance, such as a fridge or oven, needing to be replaced
  • Needing to travel for an emergency, for example if a family member who lives far away becomes ill or dies

Despite the situations that could pop up that would be easily solved with an emergency fund, according to Money.co.uk over 26% of people in the UK don’t have one. If something were to happen, they’d have to somehow find the money needed to cover the costs. For many people, this could mean having to take on debt, such as paying with a credit card or taking out a loan.

The trouble with taking on debt to deal with unexpected costs is you’ll then be paying interest on top of the money you borrowed. That makes borrowing money far more expensive in the long-term than saving it before you need it.

It’s never too early or too late to start working on an emergency fund. The earlier you start, the sooner you’ll hit your goal and have peace of mind that you’re ready if anything unexpected happens.

Building up your emergency fund takes time and discipline, but it’s worth it for the comfort you get from knowing you can weather almost any financial storm without borrowing money.

Planning your emergency fund

Building up an emergency fund can feel overwhelming. But, like most financial goals, planning and saving regularly can make it much more manageable.

1. Figure out how much money you should have in your emergency fund

How much money you should have in your emergency fund will be different for everyone and will depend on how much you tend to spend.

The golden rule

Aim to save the amount of money you’d need to cover between three and nine months of necessary expenses, at least.

This is in case you lose your job, which can be a time when you’re most reliant on an emergency fund.

If you’re familiar with budgeting, you probably already know how much your monthly necessary expenses add up to. This will include your rent or mortgage payments, transport costs, bills and the average monthly cost of essential items like food and toiletries.

Once you know how much you need to cover your basics every month, simply multiply that by the number of months you want to be prepared for in case of a loss of income.

For example, if your monthly essential spending adds up to around £1,200, you’d have to save up:

  • £3,600 to be covered for three months, or
  • £7,200 to be covered for six months, or
  • £10,800 to be covered for nine months.

Saving up this kind of money can feel like an impossible task, but don’t let the numbers discourage you! The important thing is knowing what your goal is so you can work towards it at your own pace.

2. Budget for your emergency fund

Once you’ve decided how much you should have in your emergency fund, you need to figure out how to build it. As with most savings goals, consistency is key, so you’ll ideally be putting some money in your emergency fund every month.

  1. Make a budget plan and figure out how much you can put away in your emergency fund each month - this is where something like a budget rule can help you.
  2. Then check how long it would take you to hit your emergency fund goal if you put in that exact amount every month.
  3. If it looks like it would take too long, go through your budget and see where you can cut down on other expenses to prioritise saving.

If the amount you’re able to save still doesn’t seem like a lot, don’t worry - having a small amount in your emergency fund is always better than nothing. Every £1 you save, is £1 you won’t need to borrow if times get tough. It’s important that you’re still left with enough money to live comfortably.

3. Decide what type of account to use for your emergency fund

When it comes to deciding what type of account to use for your emergency fund, you have a few options available to you. There’s no best option to suit everyone, but it’s likely that one will work better for you.

The golden rule

There are two main factors you should consider when choosing where to keep your emergency fund.

  • The account should be easy and quick to withdraw from, as you never know when you might have to use it.
  • The account should be hard to dip into, so it shouldn't be an account you already use for daily purchases.
  • It should be a separate account from other savings goals, so you can better keep track of your money.

Since you’re likely to have to withdraw money on short notice, it’s usually recommended you save your emergency fund in cash, as it can take a few days to get money out of stocks and shares accounts. Here are some of the more popular options.

Easy access or instant access cash savings accounts

This tends to be the most popular account for an emergency fund. Like the name suggests, these accounts are easy and quick to withdraw from, meaning you’ll be able to access the money quickly if something unexpected happens.

There’s a variety of easy access savings accounts out there with different rules and limits, so if you do choose this type of account for your emergency fund, take the time to shop around. Since an emergency fund is something you’ll want to keep around forever, you’ll ideally be looking for something with a good interest rate, so your money has a better chance to grow in the background.

Current accounts

These are even faster to withdraw from than easy access savings accounts, but they come with the risk that you might accidentally dip into your savings.

If you do choose to build your emergency fund in a current account instead of a savings account, you could get rid of the bank card for that account so there’s less of a chance of you chipping away at your savings.

Savings “pots” in a current account

If you don’t like the idea of managing multiple accounts, you can keep your emergency fund in a savings “pot” or “vault” for a current account you already use. You’ll have to move money from your savings pot to your current account to use it, meaning you have to choose to use that money so you’re less likely to accidentally spend it.

It’s worth noting that withdrawing from a savings pot usually only takes a few seconds, and the easier it is to get to the money, the harder it is to resist the temptation on those days when a little extra cash would be really nice!

4. Start building your emergency fund

Once you’ve covered all of the above, it’s time to get on with it!

Now you know how much you can put away every month, you can set up a direct debit to pay into your emergency fund account automatically. This will mean you’re building your emergency fund without having to think about it too much or even remember to make payments.

You can still make extra payments on top of the direct debit, for example if you get money as a gift or from a bonus at work.

Maintaining your emergency fund

At some point, you’ll run into one of those situations that your emergency fund was made for and you’ll have to take money out. And as your situation changes over time, your emergency fund should change too.

Replenish your emergency fund after you use it

You ran into an unexpected situation and you had to use your emergency fund - that’s why it’s there! You saved yourself from having to borrow money to get out of a tight spot, so give yourself a pat on the back for being well-prepared.

Just make sure you put that money back. If you’ve had to take a lot out and your fund is looking pretty bare, you might want to increase your direct debit to make sure you’re covered if something else happens.

Keep saving past your goal

While it’s recommended to have at least three to nine months’ worth of expenses in an emergency fund, you don’t have to stop saving once you hit that number. After all, the more money you have in your emergency fund, the less you have to worry about any unexpected costs.

If you feel like you’re at a good place with your emergency fund and you’d like to save for something else, you can always reduce how much you’re paying in every month.

Review your budget regularly

Emergency funds can take a while to build up, so it’s normal for your circumstances to change in the meantime.

You should review your income and expenses at least once a year and make changes if you need to.
If your expenses have gone up, for example, you’ll now need a bigger emergency fund in case you lose your source of income. So you might want to increase how much you’re paying in each month.

If your income has gone up, you might be able to afford to put more money in and hit your goal sooner.

Saving for other financial goals

Just because you’ve started building up your emergency fund doesn’t mean you have to give up on your other savings goals. An emergency fund should run alongside any other financial goals you might have, whether that’s buying a car, a deposit for your first home or your dream holiday.

If you’re thinking of keeping your money saved for at least five years, a stocks and shares account might be a good option, as money invested in the stock market has good potential to grow over the long term, though there’s always some risk you might lose money.

All ISAs are tax-free, meaning you won’t pay tax on any money you make.

A lifetime ISA could be a good option if you’re dreaming of owning your own home or if you’re saving for later life. You get a 25% government bonus on everything you invest and you can put in up to £4,000 each tax year, meaning you could get up to an extra £1,000 in your lifetime ISA. Just be careful not to take money out for anything else as you’ll be charged a withdrawal fee if you’re under 60 and the withdrawal isn’t for your first home.

For other long-term financial goals, a stocks and shares ISA could be a good option, as you can put in up to £20,000 and you can withdraw the money for anything you like without a penalty fee.

Stocks and Shares ISA

With one, simple annual management charge of 1.1%, our Stocks and Shares ISA could be a good option if you're looking to invest over the long-term.

Lifetime ISA

If you want to save for your first home or for life after 60, our Lifetime ISA could help as you'll gain a 25% boost from the government on top of your savings, as well as any potential stocks and shares returns.

Our Stocks and Shares ISA and Lifetime ISA invest in stocks and shares. This means they have good long-term growth potential, but the value of your investments could go down as well as up so you could end up with less money than you've put in.

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