The importance of an emergency fund

Everyone should have an emergency fund to help tide them over in difficult times and provide some financial security when most needed. You’re far less likely to experience financial difficulties or have to borrow at a high interest rate if you have money set aside for emergencies.

Metaphorically known as ‘saving for a rainy day’, this is the money you save to pay for the unexpected, such as an unplanned bill or change in your circumstances such as job loss or being unable to work due to illness.  It might also help you sleep better at night!

How much should I save?

Deciding how much you need depends on your circumstances, financial responsibilities, dependants, the kinds of emergencies you might face or how much insurance protection you have.  If you have insurance which provides an income or pays some of your bills if you lose your job or are unable to work due to illness - or perhaps a house, car or dental policy - this would cover you for some emergencies and expensive bills. It will also affect how much you need in your emergency fund as you may only need enough to tide you over until these payments kicked in.  But generally, you should have enough money in your emergency fund to cover your expenses for at least three months.

Saving regularly is a good way to build up an emergency fund and, if you get into the habit of saving monthly, your savings will soon mount up. 

Some people like to have more than one emergency fund such as one to replace income if you’re unable to work and another to cover any unexpected one-off or larger-than-expected bills. But regardless of how many emergency funds you choose to have, your rainy day money should always be easily accessible, such as in an easy access savings account or instant-access cash ISA. Avoid accounts with a long period of notice to take your money out. 

Should I still save if I have debts? 

Having some savings means you won’t have to fall back on expensive borrowing if you do have an unexpected expense so, if your debts are manageable and low cost, this shouldn’t stop you starting an emergency fund. However, if you have expensive debts such as credit card or overdraft debt, arrears on your mortgage or a payday loan, you should consider using any spare money to pay these first.  See the Money and Pensions Service for useful guidance on whether to save or pay off debts first. 

My top tips to help you save: 

• Set up a monthly transfer to automatically transfer money from your current account into a savings account.
• Set up the transfer to go out of your bank account straight after you get paid or receive your pension or benefits.
• Keep your savings in a separate account from your everyday spending so you’ll be less tempted to spend them.
• If you don’t think you can afford to save, try monitoring your spending for a month or two. You may identify areas you can cut back on, or be able to free-up money by switching to a cheaper deal.
• If you get a pay rise, think about saving some of it before you get used to having the extra cash.