An emergency fund is a savings pot that you put aside to cover you in case of a financial shock, such as losing your job or a large, unexpected expense.
It can help prevent you having to borrow money or being forced into making certain financial decisions by giving you savings to fall back on when you need it most.
How much you need and what an ‘emergency’ is will depend on your situation. Here are some steps to get started.
Decide how much you need
It’s generally recommended that an emergency fund be equivalent to about three months’ worth of living expenses. So if your monthly outgoings – including rent or mortgage and all other expenses – are £2,000, you should aim to have at least £6,000 set aside. It may take you a while to save up, but even a small emergency fund is better than nothing, so don’t be discouraged.
Start by looking back at your expenses over the last three months to get an idea of how much you spend. Then use a budget to see how much you could save into the emergency fund each month.
Explore more: How to create a budget
Based on the amount you’ve decided to regularly save, how long will it take you to reach your emergency fund goal? It can be helpful to keep a target date in mind and also set small milestones along the way so you can celebrate progress.
It can also help to create a separate savings account for your emergency fund so you’re not tempted to dip into it. Plus you may be able to earn some interest to add to your savings.
Explore more: How to save money
Set clear rules
Whether you’re building an emergency fund for yourself or with someone else, it’s important to establish everything clearly at the outset.
What is an emergency and when will it be okay to use the money? Examples could be:
- job loss
- medical bills
- car or home repairs
Set these out so you’re not tempted to spend the money on a new outfit for a friend’s wedding or something else you may regret later.
Explore more: How to make financial decisions you won’t regret
Keep it topped up
If you do have to use your emergency fund make sure you make a plan to top it back up. It’s important not to let it dwindle down over time.
It is also worth assessing your emergency fund on a regular basis. Your expenses can change, so what was three months’ worth of expenses a year ago may no longer be quite enough.