Building an emergency fund

When something you rely on breaks, such as your central heating or car, having money put aside to pay for it to be repaired or replaced, makes life a little less stressful. Similarly, if you fall ill, or you lose your job, having enough money put aside to pay your essential bills will give you breathing space to recover or find a new job. That is why building an “emergency fund”, savings which are there to help you deal with the unexpected things life sometimes throws at you, is something everyone should do.

Here we explain how to build up an emergency fund and ensure that when things don’t go quite as planned, you have the money to deal with it.

1. Start now

There is an old proverb that says: the best time to plant a tree was 20 years ago, but the second-best time is now. The same goes for creating an emergency fund. If you don’t have money put aside to help you deal with the unexpected, don’t despair. By starting today, you will soon have money set aside for a rainy day.

2. Save in a way that works for you

Many people find that saving small, regular amounts, works better than saving large amounts “now and again”. This is partly because small amounts seem to be less of a sacrifice or commitment, but it also allows them to quickly get into the habit of saving and see their savings pot grow. The added benefit of saving regularly is that it helps you budget your spending on a day-to-day, week-to-week and month-to-month basis more effectively. However, if that doesn’t work for you, don’t worry. Save what you can, as regularly as you can, and know that every small amount you put aside will make a difference if an emergency happens.

3. Make saving simple

Whether you save daily, weekly, or monthly, by making saving simple you have the best chance of seeing your emergency fund grow. There are lots of ways to do this but the following work for lots of people:

• Set up a direct debit: By automatically transferring money to your emergency fund, it’ll soon become routine.
• Use a “round up” app: There are apps available which link to your bank account and automatically round up debit card payments to the nearest £1, £5 or £10. The “round up” amount is then transferred to a savings account, meaning you add to your emergency fund as you spend.
• Use an emergency fund jar: Get into the habit of putting loose change you have into a jar or money box. You probably won’t miss 2p here and 20p there, but it will soon build up. When the jar is full you then have the satisfaction of paying it into your emergency fund account and seeing your savings jump.
• Make small changes to your spending: If you normally buy a coffee in the morning, or a sandwich for lunch, commit to bringing it from home a few times a week and put what you would have spent in your emergency fund. A few pounds here and there may seem like nothing in the whole scheme of things, but it will rapidly add up and help your emergency fund grow.

4. Remember why you are doing this

Just like when you are saving for a holiday or new car, always keep in mind why you are building an emergency fund – to ensure you can deal with the unexpected when it happens. It will help you stay focussed and keep your plan on track knowing that you are creating a pot of money that will help you if an emergency hits. If it helps, look at it as an “insurance premium” you are paying to make sure you have money when you need it. The only difference being that, unlike car or house insurance payments, these will be in your bank for you, if you ever need them.

5. Work out how much should be in your emergency fund

You may already know that your fridge or washing machine will need replacing in the future, so the cost of doing that is a good place to start. However, it’s good to have additional money put aside to help deal with the unexpected and, ideally, you should aim to build up an emergency fund that will cover your essential bills, such as your rent/mortgage, utilities, debts, and food, for a minimum of three months. So, if these add up to £1,500 a month, aim to build an emergency fund of at least £4,500. However, this may seem like a huge, and somewhat daunting, amount to save, so set an initial target, £100 perhaps, and aim for that. Once you have achieved that, set your next target and so on. The ultimate idea of an emergency fund is that it will see you through an emergency, which includes if redundancy or illness means your income disappears for a while. Always remember that anything in your emergency fund will help if the unexpected or unpleasant happens.

6. See if you can give your emergency fund a boost

If money is tight and you have little spare cash to save, don’t worry! Everything you save will help if an emergency strikes but also look at ways to free up some money by reviewing your budget. If you can cut costs, then put the saving into your emergency fund. If there are things you spend money on that aren’t essential, try to cut them out and put the money into your emergency fund instead. For example, a £15 pizza takeaway each week might not seem huge in the whole scheme of things, but if you were to swap it for a £4 supermarket pizza and save the difference, within a year you’d have almost £600 in your emergency fund.

Also, look at our recent article on Maximising Your Income which is full of great tips and advice on how to ensure you have as much money coming in each month as possible. If you manage to give your income a little boost, why not give your emergency fund a boost too?

7. Keep the money somewhere that is easy to access, but not too easy!

If an emergency does hit, its important that your fund is easy to get at, so an instant access savings accounts is ideal. If it helps motivate you, there is no harm in having a few accounts for different emergencies – one for house repairs, one for car repairs, one for rent/mortgage – just do what works best for you. It is a good idea to keep your emergency fund(s) separate from your normal bank account though. This will remove any temptation to treat yourself from your emergency fund when you are having a bad day.