Having an emergency fund is a crucial aspect of personal financial planning, providing a safety net for unexpected expenses and financial emergencies.
To cushion yourself against shockers like job losses, inflation, and other unexpected expenses, it’s recommended you keep 3 to 6 months of income in an emergency fund to easily access in times of financial need.
About emergency fund
An emergency fund is a designated amount of money set aside and saved in a readily accessible account to cover unexpected expenses and financial emergencies. It serves as a safety net, providing enough money during times of crisis or when facing unexpected situations, such as medical emergencies, job loss, car repairs, home repairs, or any other urgent financial needs.
The primary purpose of an emergency fund is to ensure financial stability and prevent individuals from relying on high-interest debt, such as credit cards or payday loans when faced with unforeseen circumstances.
By having an emergency fund, people can avoid accumulating debt, protect their credit score, and maintain control over their financial well-being.
How much money should I have in an emergency fund?
The amount of money in an emergency fund varies based on individual circumstances, such as income, expenses, and personal risk tolerance. It is generally recommended to have enough funds to cover 3 to 6 months’ worth of living expenses. However, this recommendation can differ depending on factors like job stability, health conditions, and familial responsibilities.
You can find an emergency fund calculator online to help calculate the size of the savings suitable to your needs.
According to Global Citizen Solutions, the average cost of living in the UK for an individual living in a one-bedroom apartment is nearly £1600 per month. This means, that if you are planning to start with 3 months’ worth of expenses, your emergency fund should have 3 X 1600 = £4800.
How can an emergency fund help?
An emergency fund can be a valuable resource to navigate various unexpected situations and financial challenges. Here are some common situations where having an emergency fund can provide crucial support:
1. Job loss
If you suddenly lose your job or face unexpected unemployment, an emergency fund can help cover essential living expenses, such as rent or mortgage, utility bills, groceries, and other necessities, while you search for new employment.
2. Medical emergencies
Dealing with unexpected health care or accidents can be financially burdensome, especially if they lead to high medical bills or the need for time off work. An emergency fund can help alleviate the stress of medical expenses and enable you to focus on recovery.
3. Car repairs
Cars breaking down or needing significant repairs can be expensive and unforeseen. An emergency fund can help cover the costs, ensuring you have reliable transportation to get to work or handle other essential tasks.
4. Home repairs
When faced with home repairs due to damage or wear and tear, having an emergency fund can prevent financial strain and ensure that necessary repairs are promptly addressed to maintain the value and safety of your property.
5. Unplanned travel
There may be times when you need to travel unexpectedly, such as attending a family emergency or a last-minute event. An emergency fund can cover travel expenses without causing disruptions to your regular budget. Here is our detailed guide on how to save money for a holiday.
6. Family emergencies
If you need to support family members during emergencies or unforeseen circumstances, having an emergency fund can enable you to provide assistance without compromising your financial stability.
7. Major applicant repairs or replacements
When essential household appliances like refrigerators, washing machines, or heating systems break down unexpectedly, having an emergency fund can cover the costs of repair or replacement.
Where should I keep my emergency fund?
When deciding where to store your emergency savings, consider factors such as instant access, safety, and potential growth. Here are some recommended places to keep your emergency fund in the UK:
- High-interest savings account: Look for a high-interest savings account offered by reputable banks or building societies. These accounts typically provide a better interest rate than regular savings accounts, allowing your emergency fund to earn some modest returns while remaining easily accessible.
- Easy access savings account: An easy-access savings account offers the advantage of immediate access to your funds without penalties or withdrawal restrictions. This type of account is suitable for emergencies that require quick access to cash.
- Cash ISA (individual savings account): A Cash ISA is a tax-free savings account that can be an attractive option for keeping your emergency fund. The interest earned in a Cash ISA is tax-free, allowing your savings to grow faster compared to taxable accounts.
How to build an emergency fund?
Building an emergency fund may seem very daunting at first, but believe it; it’s the first step that’s the hardest.
- You don’t have to do it all at once. Start with making a budget for all your monthly expenses.
- If you think items in the budget can be avoided, remove those costs from your budget. Check out ways to cut expenses to save money.
- Set a savings goal as per an emergency fund calculator or your analysis.
- Aim for a small fund first and scale it up as you save more.
- Make a regular emergency savings plan. It could be weekly, fortnightly or monthly, as per your income. Even the smallest of savings, if done regularly, can make a huge difference.
- Start saving first before paying for your expenses.
- Automate the emergency savings process by setting up ‘direct debit’ into your Emergency Savings Account.
- Add extra money to the savings account whenever you receive gifts or bonuses.
- If you also have debt, plan your savings accordingly. Prioritise repaying expensive debt such as payday loans, credit card balance, etc., over saving for an emergency fund. You can do both parallelly if you have more manageable debt or a high-income stream.
- Prioritise savings for your emergency fund over other savings goals, such as a down payment for a home, a new car, etc.
- Remember to replenish your savings once used fully or partially.
What if I can’t save anything at the moment?
If money is tight at the moment and saving is hard, you could:
- Look at your utility bills and switch suppliers.
- Avail of all the benefits that you are entitled to avail.
Start building by adding a small fraction of your income to your emergency savings account. You will see that you will still create a good corpus to support you during unexpected events over time.
Read about how to save money fast on a low income in the UK
Conclusion
Having an emergency fund is a fundamental aspect of prudent financial planning and an essential safety net for individuals and families alike. This designated pool of readily accessible savings serves as a financial cushion during unexpected situations, such as job loss, medical emergencies, car repairs, or any other unforeseen expenses.
As a rule of thumb, start with a target of 3 months’ worth of living expenses in your emergency fund and scale from there on.
FAQs
Is a 12-month emergency fund too much?
While a 12-month emergency funds may seem like a sizable safety net, it can be appropriate in certain situations, but it may also be excessive for others.
Is saving £1,000 a month good in the UK?
Saving £1,000 a month is generally considered a significant and commendable amount of savings in the UK. The ability to save such a substantial sum each month demonstrates a strong commitment to financial responsibility and can help you achieve various financial goals in the future.
Disclaimer: The information given above is provided for reference only. This is not financial advice.
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