How to Build Your Emergency Fund

Few things are as essential for financial security as an emergency fund. Life is unpredictable, and whether it's an unexpected car repair, medical expense, or sudden loss of income, having a financial cushion can be a lifesaver. Yet, according to money.co.uk research, around a quarter of UK adults have less than £100 in savings. But putting money aside for when things go wrong is only part of the story.

An emergency fund provides peace of mind while allowing you to focus on long-term goals, such as buying a home or saving for retirement. In addition, a solid emergency fund can save you money by helping you avoid interest payments on loans or credit cards. With a bit of forethought, you will avoid costly debt traps and unexpected expenses. Think of it as a financial safety net that pays dividends in stability and confidence.

In this blog, I'll explore why an emergency fund is crucial, how much you should aim to save, the best places to store your money, and practical ways to build and maintain your fund. Whether starting from scratch or looking to bolster an existing safety net, these tips will help you take control of your financial future.

Why Do You Need an Emergency Fund?

An emergency fund is a financial buffer to protect you against unexpected expenses without using high-interest credit cards or loans. When maintained correctly, you can navigate financial hiccups without derailing your future spending ambitions. For example, a sudden boiler breakdown might cost upwards of £2,000, a significant amount to cover if you're living paycheck to paycheck.

A survey by NerdWallet UK in 2024 indicated that, on average, individuals estimated they could only maintain their current lifestyle for just over four months if they lost their job. Without the parachute of an emergency fund, you might need to rely on payday loans or credit cards, which can often result in a cycle of debt that is difficult to escape. Like most things in life, tackling problems head-on is better than putting your head in the sand and hoping for the best!

How Much Money Should You Have in an Emergency Fund?

Your unique circumstances and financial goals shape how much you can save for an emergency fund. Factors like your monthly expenses, family size, and job stability will ultimately help you to decide, and it’s even possible to save on a low income. The key is to strike a balance between setting an ambitious target and creating an achievable plan. Building an emergency fund is not about perfection but persistence!

Set a Realistic Target

According to data, the average UK resident saves approximately £105.43 per month, equating to about 8.21% of their monthly income. Financial experts like Experian typically recommend saving three to six months' worth of essential living expenses. That includes day-to-day essentials like rent or mortgage payments, utility bills, groceries, and transportation. For example, if your monthly necessary expenditures total £1,500, your target emergency fund should be between £4,500 and £9,000.

Start Small and Build Momentum

The goal of building an emergency fund to cover all eventualities may seem daunting, but even a modest amount saved for a rainy day can make a big difference. Start by aiming for £500 to £1,000 as a short-term goal. The more achievable amount you save will be enough to handle minor emergencies while giving you the confidence to keep saving. Use our emergency fund calculator to help you break down your savings potential.

Where Should You Keep Your Emergency Fund?

If you’re asking, "Should I have an emergency account?" the answer is most definitely yes. But finding the right place to collect your emergency fund is just as important as saving for it. The account you choose can significantly affect how effectively your fund serves its purpose. Whether you prioritise instant access, competitive interest rates, or safeguarding your capital, exploring where to keep an emergency fund in advance is important.

Easy Access Savings Accounts

Your emergency fund should be secure, easily accessible and separate from your daily spending. I know from experience that an Easy Access savings account is an excellent option, allowing you to withdraw money quickly when needed. Many UK banks and building societies offer these accounts, often with competitive interest rates. Use comparison websites like MoneySavingExpert to find the best savings account for an emergency fund.

Avoid Risky Investments

While investing your emergency fund for higher returns might be tempting, leaving your savings to the whim of market fluctuations is dangerous. Don't be easily charmed by promises of attractive returns; investments can and often do lose value. You may also find it difficult to access your funds quickly when needed.

Premium Bonds as an Alternative

If the idea of earning benefits on your savings appeals, Premium Bonds by NS&I could be worth considering. The Premium Bonds are perfect for anyone looking for a secure and accessible option with a chance to win tax-free prizes. Returns are not guaranteed, but at the very least, they keep your capital safe and provide instant access to your money.

Practical Tips for Building Your Emergency Fund

Making small adjustments to your financial routine will let you gradually build a robust safety net. From automating your savings to wisely making the most of unexpected windfalls, there are countless ways to grow your emergency fund without feeling deprived. I have found that the key to staying committed is to view every contribution as a step toward financial security, no matter how small.

Automate Your Savings

One of the easiest ways to boost your emergency fund is to set up a standing order. Transfer a fixed amount into your monthly savings account to build a nest egg steadily. Busy lives often lead to important tasks like transferring money between accounts getting overlooked. Automating the process ensures consistency and removes the temptation to spend money elsewhere.

Cut Back on Non-Essential Spending

It's a good idea to regularly review your monthly budget to identify areas where you can afford to cut back. Do you have any unused subscriptions that could be cancelled? Perhaps consider dining out or getting takeaways less often to make your money go further. Finding cheaper alternatives for everyday groceries can also add up over time. For example, swapping a daily £3 coffee for a homemade brew could save you nearly £1,000 a year! Learning how to become debt-free will also unlock more possibilities to save.

Use Windfalls Wisely

If you're lucky enough to receive unexpected money, such as a tax rebate, work bonus, or cash gift, consider putting a portion (or all) of it into your emergency fund. Money windfalls can significantly boost your savings without affecting your monthly budget, so it pays to avoid the spending temptation that comes with unexpected things like lottery wins and competition prizes.

Take Advantage of Government Benefits and Schemes

Far too many of us don't take advantage of government schemes designed to provide financial support. Schemes like Universal Credit or the Warm Home Discount can free up money in your budget to then allocate toward savings. Check your eligibility on websites like Gov.uk, and don't be ashamed to get what you're entitled to. If you're eligible for benefits or tax credits, claim them!

Consider Pension Sidecar Savings

Employer-backed savings schemes like "sidecar" arrangements have gained popularity among younger employees because they automatically save a portion of a person's salary. Traditionally a tool to encourage people to save for retirement, sidecar plans allow access to savings in case of an emergency. Research by BlackRock found that 95% of Generation Z and 85% of millennials favour this setup, indicating a strong preference for automated saving mechanisms to build financial resilience.

Maintaining Your Emergency Fund

Creating an emergency fund is only part of the battle. Your fund needs to evolve with your financial needs and circumstances, ensuring it’s ready to support you whenever life throws a curveball. Good maintenance can be hard work because it involves discipline, regular checks, and strategic adjustments. Psychological insights highlight that the human brain's inclination towards immediate gratification can make prioritising long-term savings over immediate spending challenging. But the reward of long-term financial stability and peace of mind far outweighs the minuses.

Here’s how to ensure your fund stays healthy:

• Replenish After Use: If you need to dip into your emergency fund, prioritise replacing the money as soon as possible.
• Adjust for Changes: Inflation and lifestyle changes can impact the adequacy of your fund. Periodically increase your savings target to maintain its value.
• Separate from Regular Savings: Keep your emergency fund distinct from other savings to avoid accidentally spending it on non-emergency expenses.
• Define Emergencies: Create a personal definition of what qualifies as an emergency to prevent unnecessary withdrawals. Stick to your criteria to ensure the fund is available for genuine needs.
• Consider Tiered Accounts: For larger emergency funds, divide the money between a high-interest account for longer-term savings and an easy-access account for immediate needs.
• Let Technology Help You: There is a huge assortment of money-saving apps and banking tools that will you manage your money more effectively. The chances are that your existing bank has free advice on emergency savings.

Final Thoughts

I cannot underestimate the importance of taking steps towards financial security with an emergency fund. Yes, it requires discipline and effort, but with time and persistence, you’ll get emergency money to create a robust safety net. Start small, set achievable goals, and make saving a habit to navigate life’s uncertainties with confidence.

Finally, remember that there’s no one-size-fits-all approach to saving. Always tailor your strategy to your particular circumstances, and don’t hesitate to seek advice if you need it. Your future self will thank you.