What is an emergency fund?
An emergency fund is a pot of money you put away and only access when you have an unexpected expense that other financial sources can’t cover. It can afford you some breathing space if you run into hard times financially. Knowing you have an emergency fund to help you out can not only bring peace of mind, but it can also prevent you from dipping into your long-term savings.
Why should you have an emergency fund?
Imagine you’re suddenly hit with an urgent home or car repair, or you’re unable to work. Unplanned events like these can mean taking a significant financial hit. An emergency fund provides a personal financial safety net to help support you and your family at such times.
An accessible emergency fund can help you avoid dipping into any long-term savings, taking on debt or borrowing money. It can also offer some peace of mind knowing you have some financial protection in the short term.
How much emergency fund should I have?
The size of an emergency fund will vary according to individual needs. A common guideline is to save between three and six months' worth of day-to-day living expenses. For example, if your monthly expenditure is roughly £2,000, then you’ll need to save £6,000 - £12,000 into your emergency fund.
You can assess how much you need by reviewing your past monthly expenses. Note down the amounts for things like:
- a month’s rent or mortgage payments;
- groceries; and
- recurring bills like phone, gas and electricity.
Total these amounts and multiply by three or six (or a different number of months) to calculate your emergency fund size.
As well as monthly costs like the above, how much you need will be impacted by individual factors. For example, if you have any dependents, like children or a spouse, a medical condition with ongoing costs or if you work for yourself and your income varies each month.
How to build an emergency fund
Once you know how much you’ll need, there are a few important ways to go about building your emergency fund.
Budget how much you need
Create a budget for how much you could save each month into your emergency fund and set aside what you can. Look for ways to budget from your existing financial sources, such as:
- Reducing any existing expenses - especially from non-essential spending. For example, cancelling or going down to a lower tier on a subscription plan.
- Looking for cheaper alternatives - use websites and online tools to compare energy or broadband providers. This way, you can see if you can save any money on your monthly bills.
- Saving any lump sums - if you’re paid a bonus from work or get a tax refund, consider adding a lump sum to your emergency fund.
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Get startedOpen a separate savings account
A separate savings account can help ring-fence your emergency fund, keeping it set aside for its purpose. It also means you’re less likely to spend from it, so it’s there should you need it.
It also offers the benefit of earning interest on top of your contributions. It’s a good idea to open an instant access savings account. You’ll usually earn less interest than a fixed-term savings account, but it offers the flexibility of accessing your funds when you need to, without paying a withdrawal fee.
Automate regular saving
It could be helpful to set up regular automatic savings into your emergency fund from a current account. This can ensure that, like other crucial monthly payments, your emergency fund is prioritised.
Start small, save often
Reaching your emergency fund target can seem a little daunting. The key thing is to start putting aside as much as you can, as often as you can.
Be consistent in adding to your emergency fund. Even small amounts, when added regularly, can help you reach your goal.
Keep your emergency fund topped up
If you ever need to dip into your emergency fund, make sure to add money back to keep it topped up to your target amount.
Review your emergency fund
As your daily living expenses change, the size of your emergency fund will likely need to change, too. Regularly review your emergency fund, think about how long you need it to last and re-budget if you need to.
Summary
- Daily living expenses - a good rule of thumb is to have three-to-six months of living expenses.
- Emergency fund size - add the cost of your regular monthly expenses and multiply by the number of months you aim to cover.
- Open an instant access account - keeping your emergency fund in a separate account reduces the chance you’ll spend from it.
- Regular automatic payments - set up regular payments if you can to ensure you prioritise building your emergency fund.
- Save what you can - add any amount when you can to reach your target emergency fund size.
- Reduce outgoings - cancelling a subscription and adding a lump sum, like a bonus, can help you build or top up your emergency fund.
- Review your emergency fund - make sure it continues to cover your living expenses for your target number of months by regularly reviewing how much you need to keep in it.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 20-06-2025
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