Stacks of pound coins

Things can go wrong at any minute, from an unannounced car or home repair to suddenly finding yourself without an income. As a result, they can have a devastating impact on your finances unless you’re prepared. It’s crucial to have emergency savings that are readily available if (and more likely when) these situations hit. But how much is too much and are you missing out?

Whilst it’s ultimately down to your personal circumstances, some general rules of thumb on how big your emergency savings should be will help you be ready for when the time comes and ensure your money is hard at work for you.

According to a 2018 survey, 27% of people in the UK have no savings that can be quickly accessed in the event of an emergency.

Independent 08/04/18

What are emergency savings?

The emergency fund is a crucial foundation for successful personal finance and creates stability by being prepared for unforeseen circumstances without needing to rely on a line of credit with associated interest charges.

“Emergency savings are a readily available account with funds specifically set aside for a personal finance crisis”

Emergency savings are one of the pillars to financial fitness and should be prioritised above investing or paying off the mortgage.

Do you need an emergency fund?

What could go wrong, right? Common financial dilemmas that emergency savings help protect you against include:

  • Material house repairs (not covered by insurance)
  • Appliance breakdown (washing machines, tumble dryers, and dishwashers are all common culprits)
  • Unemployment/loss of income (insurance can be really expensive)
  • Sickness/illness (even many private health care policies have exclusions including existing conditions)
  • Car troubles (or even unplanned upkeep on expensive models)
  • Split from a partner (increased bills, moving costs)
  • Divorce (legal costs, split of assets and temporary accommodation)
  • Unplanned travel (such as seeing unwell loved ones abroad)

“28 per cent of people in the UK with debts said they would struggle with rising interest rates”

ING International Survey 2018

When to start saving for an emergency fund?

Now! However much, start now. Because anything is better than nothing. Saving just £3 per day gets you to the base level £1,000 emergency fund in less than a year. Skip the morning latte and invest in your financial fitness, anyone?

Three HUGE Benefits of Emergency Savings

There are many benefits to the emergency fund. Here are the top three.

1. Save on expensive interest charges. When the emergency hits and there are no funds allocated for such an event, people turn to credit. Be it personal loans, credit cards or worse, payday lenders. Either way, this lack of planning comes with hefty interest charges that mean the emergency ends up costing far more in the long run.

2. Less stress. There is a huge emotional benefit to feeling prepared. No worry, no fret, no sleepless nights. Just embrace that sea of calm knowing you’re ready for anything. Having the security that you and your family are financially self-sufficient for six months is greatly empowering.

3. Positive Money Mindset. Allocating savings as part of your budgeting, before working out what’s left over for Nando’s and other frolics, follows the ‘pay yourself first’ mentality of successful personal finance. Savings of any form should be viewed as a mandated monthly outgoing.

Emergency Savings – how much money is enough?

How much to save in your emergency fund is usually between three to six months’ living expenses and depenends on your personal circumstances.

Here are some guidelines to help you work out what’s right for you.

“The emergency fund is sacred: it is not there if you fall short one month, it is for emergencies only!”  

Base level: £1,000

£1,000 is considered the base-level emergency savings and should cover low-level emergencies. It stops you using a credit cards with exorbitant interest charges that only makes the situation worse.

This base-level emergency fund should be saved before even clearing debt.

Three month’s living costs  

Consider this level if you:

  • are a single person
  • have no dependents
  • are in a living / romantic situation providing a dual income
  • are debt free (you should clear any debt before saving for this level)
  • live with parents
  • have a higher tolerance to risk
  • have income protection insurance
  • work in a stable industry
  • have a consistent, predictable income

Example – if your living costs for housing, utilities, debt, food, and other essentials are £1,000 a month, then shoot for £3,000.

Six month’s living costs

This may be more appropriate if you:

  • have dependants/are a family
  • rely on a single income
  • have a lower tolerance to risk
  • have debt (though you should clear any debt before saving for this level)
  • inconsistent income/freelance
  • are retired
  • Are living through a recession/period of high unemployment
  • Work in a high risk/unpredictable industry

Example – if your living costs for housing, utilities, debt, food, and other essentials are £2,000 a month, then shoot for £12,000.

Know more: where to store your emergency savings

The Emergency Fund – is bigger always better?

Is bigger better? As we all know (ahem), NO!

One of the pre-requisites of an emergency fund is that it is easily accessible. For that reason, many people plump for a current or instant access account. Easy to get at maybe, but that usually means low-interest rates and missing out on opportunities where your money could be working harder for you and earning more.

It’s what you do with it that counts”.

Beyond the three to six living expenses point, bigger is NOT actually better. Your money will be working harder for you and earning more interest in higher interest savings accounts (often with restrictions such as when you can get at your cash) and investment homes, such as low-cost passive index funds, where they will likely outperform over the longer term.

How much money you stack in your emergency fund is down to your personal circumstances. Just remember to revisit this and adjust accordingly of your situation or economic environment changes.

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Emergency savings – how much should you have?