Emergency fund (UK) – how much to save, where to keep it, and when to use it

Much as we love investing here at Monevator, even we believe saving for an emergency fund comes first. Building a cash stash to bubble wrap you against life’s bad breaks is probably the most important financial move you can make – after clearing bad debt, of course.

Stuff happens, as they say in polite company, and that’s the starting point for why you need an emergency fund.

Why you must have an emergency fund

When you’ve got a job and good health and your income exceeds your outgoings, setting cash aside might not even occur to you. But without savings, you’re walking a tightrope – and the smallest shove can send you into the abyss.

You might not be hit by one of the life-changing shocks that kicks people on to the streets. But there are plenty of smaller things that can go wrong:

  • Your income may drop unexpectedly, and no longer cover your essential expenses.
  • A member of your family could get ill, and you want to hurry forward treatment.
  • Something might blow up – from the archetypal boiler to a car engine.
  • The roof could literally fall in.
  • A far-flung relative could get married or get cancer. Either way you might want to fly out to be with them.
  • Your investment platform could go bust, leaving you in need some other source of cash to live on while the administrators clean up the mess.

A sudden divorce, job loss, illness, or a lurch into debt can push any of us into a downward spiral.  But having a good emergency fund on standby helps ensure that you never enter that parallel universe. 

At the very least, you’ll feel better just knowing your rainy day savings are there. 

How much emergency fund should I have?

Save at least three to six months’ income.

Having this amount on hand is a good starting point. It’s not a magic number but a balance of considerations.

Obviously, there’s no limit on how much you could save for a rainy day. You could argue that a plumper cash cushion is best. Indeed, why not save to cover one year or even two?

By all means tailor your fund to match your circumstances. But be realistic about how quickly you can save your disaster-dodging dollop.

Aim to save too much, and spare cash won’t be going where it might do you more good long-term. (Think paying off a mortgage, or investing in higher growth assets.)

Cut your cloth

It’s better to think about your emergency fund in terms of your monthly after-tax income rather than an arbitrary and set amount of cash. 

A £10,000 emergency fund is obviously superior to having £1,000 in emergency savings, but it’s your monthly burn rate that counts. If the bare essentials cost your family £5,000 a month then even a £10,000 emergency fund won’t last long. 

So first, think about how much money you’d need to pay the bills for a month if you cut back on all the non-essentials you can live without in a crisis. 

A budget planner can really help with this step. 

Now imagine you’re out of work for several months because of unemployment during a deep recession, or due to an unfortunate illness. 

Six months’ income (after tax) should get you through that kind of scrape unless you’re really unlucky. 

In theory, six months’ worth of net income in your emergency fund will last longer than six months on an emergency budget. That’s because your income normally pays for life’s little luxuries, too. 

But that extra wiggle room may be a lifesaver if you things go from bad to worse.

Say, for example, your car conks out just before a big job interview. With enough in your emergency fund, you’ll be able to afford an immediate replacement in the nick of time.

If money is very tight, then save three months’ worth of essential expenses (as opposed to net income). That is the bare minimum you should aim to hold in your emergency fund. 

Where to keep your emergency fund (UK)

Keep your savings in instant access cash.

Do not be tempted to invest your emergency fund, seeking a better return. 

There’s absolutely no point running the risk that your emergency savings are halved in value – just when you need them most – by a stock market slump.  

Remember that stock market falls are correlated with recessions. 

Covering a period of unemployment is a prime use-case for an emergency fund. That’s more likely to happen when the economy as a whole is in recession – also usually the worst time to be in equities. 

So limit your ambitions for your emergency money to earning the best interest rate you can from an instant access account. 

The Best Bank Account comparison tables will put you on the right track. Choose from current accounts, instant access savings, and ISA accounts.

Make sure your cash is held in institutions (ideally more than one) covered by the Financial Services Compensation Scheme (FSCS)

Another good tip is to keep your emergency fund separate from other savings

Ideally, your rainy day savings should be in a different account to any money you’re putting towards a car, a holiday, or a pet parrot.

If you’re very disciplined you could keep it all together and vow that the first £10,000 (say) is untouchable. 

But in practice few of us are saints. So unless you’re expecting to get your halo in the post, put your emergency money elsewhere.

When to use your emergency fund

Spotted a delightful new fridge freezer that you simply must have when out shopping? Come across a bargain holiday?

Those are not emergencies.

Some people are unused to having cash savings. As soon as they’ve saved any money they’re tempted to spend it. It’s even harder if your partner has a different mindset to you.

Decide what is — or what isn’t — an emergency at the outset. Then start saving for anything else after you’ve built up your fund.

We offered some suggestions for valid emergencies near the top of this article.

Review your emergency fund regularly

The money you saved when you first graduated from college won’t be sufficient when you’ve got two kids, a spouse, and a house. 

Make sure you review your fund at least annually. Expenses, liabilities, and inflation all creep up at least as fast as salaries rise. Top-up as appropriate.

It goes without saying that should pay back any cash you withdraw ASAP, once the emergency has been dealt with.

Think about insurance for some emergencies 

Don’t mistake emergency savings for financial invincibility.

Big hits to your property, income, or health can dwarf your emergency fund.

The best protection is a mix of cash buffer zone for smaller mishaps, plus insurance that covers you and your family from catastrophic loss to life, limb, and property.

Check out our useful articles on making the best use of insurance

Bear in mind that insurance companies can take a while to pay out, or even fail to do so altogether. Another instance in which an emergency fund can be a lifesaver. 

Emergency fund UK: don’t use debt!

A lifestyle that habitually requires you to dip in and out of debt is the type most likely to get derailed by a cash call.

If you bought your kitchen on credit, there’s a strong chance that you’ll try to fend off any unexpected outgoings with your credit card or a personal loan.

But what if your particular emergency is a cut in your income? Increasing debt payments in the face of a falling income is about the worst thing you can do. Short of selling a kidney.

Avoid this at all costs, by saving cash in advance and shunning debt. Even if your salary is secure, increasing debt payments will leave you more vulnerable when fate deals you a blow.

Companies go bust due to cashflow struggles. Debt is often the multi-tentacled monster that drags them under. And people are the same.

Get out of debt, then start saving into your emergency fund.

Emergency money gives you confidence

The final reason you should build up your emergency cash reserves is because it will give you the security to (separately!) invest in the stock market – and ultimately enable you to meet unexpected expenses without liquidating your equities when they’re down. 

With a sufficiently big emergency fund in place, you’ll find it easier to develop the lofty disdain necessary for long-term investing.

Marie Antoinette offering cake from within her palace walls when the rioters are at the gates should be your role model when investing. Not Corporal Jones in the BBC classic Dad’s Army, panicking at the first hint of trouble. 

Cash on hand gives you that security. With an emergency fund saved to cover your unforeseen expenses, you needn’t worry when the market wobbles. 

Start with an emergency fund

Need one last nudge to build up an emergency fund? Here you go: it gives you the bug to save and invest much more.

That’s certainly what happened to me.

And I’m confident that if you’re a saving virgin, you too will get a buzz from seeing your net worth steadily going up instead of down.

Before you know it you’ll be wondering how to start investing!

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