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Emergency funds – what they are, and why you need one

Last Updated on May 25, 2022

When it comes to financial stress, the one thing that I believe has the biggest power to reduce our stress and anxiety is having an emergency fund in place.

From personal experience, the moment I had a small emergency fund built up, it felt like a huge weight was lifted from my shoulders. When something expensive crops up out of the blue (car costs or dental work are my personal faves), it still sucks to part with my money, but the fact that it’s there and I’m still able to pay my bills makes a world of difference.

It also stops you from getting further into debt, which is key when you’re trying to pay it off. 

Having an emergency fund in place is like laying the foundation for your financial future. It allows you to start striving for your big financial goals safe in the knowledge that you can afford to invest your money and lock it away until you retire, or take on a mortgage and work toward owning your home.

In this post we’ll explore the reasons why having an emergency fund is important, as well as how to start an emergency fund.

Table of contents

What is an emergency fund and why is it important?

An emergency fund is a pot of savings that you keep separate from any other spending money or savings for specific goals, just in case an unexpected cost crops up, or you find yourself without an income.

Life comes at you fast, we all know this, but knowing this and having the means to do something about it are two very different things.

It takes a certain amount of privilege to be able to get to the point of having enough money tucked away to deal with unexpected costs, unemployment, or health issues (to name just a few examples), and if you are living paycheque to paycheque or if you are in a lot of debt, it can be extremely difficult to build up an emergency fund.

In this guide, I’ll be covering some of the different ways you can build up your emergency fund, some of which are easier if you are short of time or money in the first place, and answering a lot of the frequently asked questions that crop up when I speak to people about emergency funds.

Do I need an emergency fund?

If you don’t currently have an emergency fund, then you need to start thinking about building one. If you’re struggling financially, it can feel like an impossible goal, but even just having a few hundred pounds tucked away can be a lifeline when things go wrong.

Even if you aren’t struggling financially, having an emergency fund in place will help you budget more consistently, and reach your financial goals. 

Having an emergency fund in place can prevent you from needing to rely on expensive lines of credit such as credit cards and loans, in the event of an emergency. This can be especially important if you are already in debt, as it can help you avoid sliding further into debt.

There are all sorts of situations where having an emergency fund can make a huge difference to both your finances and your stress levels. Some of these include:

  • Unexpected vehicle repairs
  • Replacing home appliances
  • A broken boiler
  • Dental bills
  • Unemployment

How much money should be in my emergency fund?

Ultimately, how much you need to save, and how long it will take you to get there depends entirely on your personal circumstances, but a good rule of thumb is 3-6 months’ worth of outgoings. 

Make sure you have enough to cover you for your regular expenses, as well as the potential of unexpected costs. A few costs to account for include:

  • Rent/mortgage
  • Utilities
  • Council tax
  • Home insurance
  • Phone and internet bills
  • Food
  • Fuel/travel

It’s up to you whether you want to have a ‘bare bones’ emergency fund that will cover you for several months if you strip your spending right back to the essentials only, or whether you want enough saved to maintain your current lifestyle.

If saving that much money feels overwhelming, just getting started will make a difference. Even just £500 in a savings account as a safety net can make a big difference in a tricky situation, so start small and work towards building up your fund.

Once you have a basic emergency fund in place, you may want to work on growing it to cover a year’s worth of outgoings alongside your other financial goals, or you may feel more comfortable investing and aiming for financial independence, or other financial goals.

Do I need a pet emergency fund?

Any pet owner will know that pets are expensive, and even if you have insurance, unexpected costs can still crop up. It’s important that you don’t forget about these costs when working out how big your emergency fund needs to be, or you could work on having a personal emergency fund and a separate emergency fund just for your pets.

Consider how much you typically spend on:

  • Pet food
  • Medication
  • Vet bills
  • Insurance
  • Replacing toys
  • Flea and worming treatments
  • Bedding
  • Litter

It’s also important to consider whether you have adequate insurance cover, or whether you would have to pay out of pocket if you had a huge emergency vet bill out of the blue.

Where should I keep my emergency fund?

If you’re wondering where to keep your emergency fund in the UK, the simple answer is anywhere that you can access it quickly and easily when you need to. The best account type for your emergency fund is somewhere where you won’t have to wait to withdraw it.

This is most likely going to be a current account or easy access savings account, and unfortunately, at the moment interest rates aren’t fantastic. Another option is Premium Bonds, but be aware that it takes several days to withdraw your money, so this may not be suitable for situations where you need access to your money immediately.

Look for an easy access account, and try to get the highest interest rate available, but try to make peace with the fact that your emergency fund is not going to keep up with inflation in our current financial landscape. One way of thinking about it is to consider it money already spent on your future security.

Should I invest my emergency fund?

Lots of people wonder whether there are any good emergency fund investment options, and it can be tempting to think about investing your emergency fund, especially if you haven’t touched it for a while. But keeping it somewhere that is easy to access is so important.

Investments take time to get hold of as you have to sell any shares or funds you hold. They can also go down in value as well as up, so you can’t be certain that you’ll be able to access the full value of the emergency fund you originally set aside when you need it.

If you find yourself thinking “should I invest my emergency fund”, remember that it’s best to keep emergency funds and investments completely separate. Perhaps investing at the same time as building an emergency fund is part of your financial strategy, but make sure you have enough set aside in cash to deal with the unexpected.

How do you build up an emergency fund?

Set aside a set amount each month

One of the most obvious ways to start building up your emergency fund is to start putting away a certain amount of your salary every month into a separate account.

Keeping your emergency fund separate from your spending and bills money is important, as it’ll help to stop you accidentally dipping into it, and make it easier to see at a glance how much wiggle room you currently have should something crop up.

But setting aside a certain percentage of your salary is only possible if you have money spare after your living costs in the first place. This becomes very difficult if you are living paycheque to paycheque. 

Sit down and figure out your budget, see if there are any areas you can cut back, and allocate that money to your emergency fund. If there aren’t, you may want to look at ways to increase your income. I’ll include some suggestions below.

If you already know that you have money left at the end of the month, it’s still worth reviewing your budget and deciding on the precise amount to save, and making sure that all of your spending is in line with your long and short term financial goals.

Top Tip: Need some help figuring out your budget? Why not check out our monthly budget spreadsheet, which does all the hard work for you 💸

Switch bank accounts

Bank account switching bonuses are one of my absolute favourite ways to get some quick and easy money into my emergency fund. This is an especially good one to consider if you are limited in both time and funds, because it takes around ten minutes to fill out the required forms, and then the banks do all the work for you.

For that ten minutes of effort you can make £100+ easily, and the best thing is you can do this as many times as there are banks you don’t already hold an account with (although you should space out applications and keep an eye on your credit rating).

Switching banks is really easy thanks for to the Current Account Switching Service, and I’ve written a really in-depth guide on how to switch bank accounts that should answer any questions you may have about the process.

The best bank account switching bonuses change regularly, but it’s always worth keeping an eye on the MoneySavingExpert best bank accounts guide, which is kept up to date with the latest offers.

Swap lottery spend for premium bonds

One thing that I used to do a lot when I was living paycheque to paycheque was regularly buying scratch cards and lottery tickets. A quid or two here and there didn’t feel like it was eating into my very tight budget too much, but the chance to win a couple of grand, or even a tenner? That was very desirable.

Sometimes I would win a tenner and it would cover whatever else I was buying, one time I even won £100 and £50 within a few days, which paid for new tyres for my car. But ultimately, in the long run, I spent much more than I ever won. 

Unless you keep a strict tally of how much you spend and win, psychologically it doesn’t really feel like you’re spending that much, but it can really add up over time.

Premium bonds are a bit like a cross between the lottery, and a savings account. You can keep money in this account, and for each £1 saved you get 1 ticket into a prize draw. 

If you don’t win, you keep your money. You don’t earn any interest, but you don’t lose your money either. If you need it, you simply withdraw it. Your money is safe, as it is backed by the government.

So will it feel like you’re winning less often? Yes, it probably will at first, but the difference is that you’re not really parting with your money. It’s there if you need it, AND you have a chance of winning more.

Premium bonds are considered by most people to be a low risk, easy access place to keep your money, and with interest rates on savings accounts currently so low, they make a great option. It’s worth thinking about how much you have to save though, as you have a higher chance of winning the more money you have saved.

If you’re somebody who gets a buzz from trying to win money, Premium Bonds are worth considering.

Start a side hustle

The term side hustle has become synonymous with hustle culture these days, but all it really means is finding ways to earn money alongside your main job.

There are so many different ways of making money, and depending on how much spare time you have you can make quite a bit of money.

Here are just a few ideas for how you can earn extra money alongside your job, and a few ways to earn money from home:

  • Mystery shopping
  • User testing
  • Focus groups
  • Surveys
  • Starting an Etsy business
  • Matched betting
  • Selling on Facebook Marketplace
  • Freelancing
  • Selling digital products
  • Affiliate marketing
  • Tutoring
  • Car boot sales
  • Photography
  • Babysitting
  • Proof reading

While side hustles are a great way to make extra money, it’s also important to make sure you’re not taking on too much and risking burnout. Job hopping might also be something to consider if you’re on a low salary and struggling to make ends meet.

I have an emergency fund, now what?

If you have a solid emergency fund in place, congratulations! You’re one step closer to financial freedom.

Now you can really start thinking about investing, maxing your pension contributions, or working towards other financial goals.

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