Budget & Saving

Building an emergency fund

An emergency fund is a financial buffer for when you are confronted with unexpected situations that could cripple your finances, such as a loss of job, medical bills, vet bills, car and home repairs.

Unfortunately, more than a quarter of UK householders have no emergency savings and nearly half of UK adults have less than £500 in the bank. In fact, emergency fund statistics across the UK are disheartening: for too many, expensive credit card debt is just one large, unexpected bill away.

You may have never needed an emergency fund before (knock on wood), but it’s better to be safe than sorry. If you start to prepare for a rainy day, you might not need to borrow money or fall into debt when and if an emergency arises.

How much should you save in your emergency fund?

Emergency fund goals vary based on individual circumstances.  On average, it is advised to build an emergency fund that can cover all your living expenses for at least 3 months, and as much as 9 months. This includes groceries, rent or mortgage, gas and electricity, and maybe your internet and transport costs. If you have a dependent partner or children, you will need to factor that in as well.

Money Dashboard can help you calculate your exact emergency saving fund goal for free, by averaging all of your recent bills and other necessary expenses.

Note: You may want to put aside less emergency funds if you have insurance policies that cover emergencies, or have other prioritised costs to cover such as debts.

If in doubt between building an emergency fund versus paying debts, see if you are paying more for your debts than you get from saving. If so, it may make sense to pay off the loans first.

How long should it take to build emergency fund?

If you haven’t already, you will want to start setting up an emergency fund as soon as possible. It is helpful to create a separate savings account for your fund—preferably one with a high interest rate—so that you’re not tempted to spend it.

Use direct debits to make regular payments into the emergency fund account, even if they are small amounts. It may take years to reach your end goal but that is fine. A small emergency fund is better than no fund at all.

Tips for building an emergency fund

Don’t overcommit yourself. Budget to save an amount that will not significantly impact your week-to week or month-to-month stability. Otherwise, you will lose your commitment to the fund or find yourself drawing from the account just to make ends meet.

Make additional payments to the account whenever possible. If you get a bonus at work, or switch to a lower rate energy provider, for example, put the extra cash aside rather than spend it.

If you’re having trouble finding spare cash to put into your emergency fund, here are some helpful tips for reducing your monthly expenses:

Check your television, streaming and internet packages

There’s a good chance you’re paying for more than you need and use.

Switch to a thriftier phone plan

Phone contracts are competitive, and you may get better value by switching to a different supplier.

Cancel unused monthly subscriptions

There may be some gym, magazine or streaming service you aren’t using or isn’t delivering the value that you hoped.

Buy used

Go for used cars, gadgets, books, clothes, and more to save significantly on both necessary and luxury items.

Spend less on energy

Changing energy suppliers every year can help you choose more competitive contracts. If not, try energy saving solutions like putting on a jumper instead of turning up the heat, and not leaving lights on when you leave a room. Small changes can lead to big savings.

Check you’re claiming all benefits

If you are on a low income, you may be entitled to more benefits than you realise.

Loose change in a jar

Big or small, every bit counts. Start collecting and putting aside the coins from your pockets at the end of the day.

Keep it topped up

If you have to use your emergency fund—a little or all of it—be sure to top it back up again. It may have taken a long time to fill up the first time, and may take just as long to refill, but don’t get discouraged.  

It is also wise to regularly reassess the amount of money you need in the emergency fund. For example, if you had a child since first setting the fund goals, or have greater living expenses, ensure the funds reflect 3 months or more of those new expenses.  Money Dashboard’s Planning tool can help you make that assessment.

Building an emergency fund versus savings

An emergency fund is a saving with an end goal: 3+ months of bills or income. The savings should be in an account that is gaining steady interest, and has no charges for cash withdrawals with little or no notice.

Savings and investments, on the other hand, can be more complex and unlimited. Stocks and bonds, even real estate, for example, are investments that are expected to grow in value over time but are not always easy to convert into cash without warning, or even tax penalties.

Once you have reached your end-goal for the emergency fund, it is okay to stop funnelling funds into the account. Rather than spending that money freely, think about channelling funds into savings and investments that can help you build wealth and security in the longer term.

Becca Lipman

Financial Editor