Did you know that that the average UK household can only survive financially for around 18 days without income? If they were to become unwell or lose their job, they have less than three weeks to find a new source of income or risk going into debt. Bear in mind that even if they were to apply for Universal Credit, the first payment takes 5 weeks to arrive!
With the increasingly uncertain times we are facing in 2023, it’s more important than ever to build up – or begin building – an Emergency Fund.
What Is An Emergency Fund?
An emergency fund is a pot of money (or other highly ‘liquid’ asset, i.e., it can quickly and easily be converted into cash) which is set aside exclusively unexpected expenses or times of financial distress.
As such, emergency funds are often the first and most effective ‘safety net’ used to pay for unexpected situations, e.g., if you were to fall ill or if an expensive white good or personal gadget suddenly breaks and needs to be repaired/replaced.
What Should An Emergency Fund Be Used For?
The whole idea of an emergency fund is that the money is ONLY ever used in cases of high financial distress; it should never be dipped into to pay for leisure in any way.
Examples of an Emergency:
- Paying for living expenses during redundancy
- Unexpected medical, dental or vet bills
- Unexpected vehicle repairs
- Home repairs that are essential (broken boiler, plumbing, etc)
- Appliance/gadget repairs that are essential
- Unexpected, essential travel (e.g., to go to a funeral)
Examples of a NON-Emergency
- Family holidays or days out
- Other leisure activities (e.g., bowling, cinema trips, etc)
- Paying for Birthday or Christmas presents
- Buying a new car
- Upgrading of a device (e.g., laptop, phone, tablet, etc)
How Much Should I Save?
Experts in the field generally advise a minimum of 3 months’ worth of living expenses.
Total up all your regular bills (for varied bills, make an estimate), your vehicle/travel costs, as well as costs for groceries and other household needs. Multiply this number by 3 and that’s the amount you want to aim for.
Over time, after reaching this goal, you should aim to increase the amount to at least 6 months’ worth of living expenses. This will then allow you to be financially prepared for almost any situation.
Here’s a few examples of how much money should be put aside, depending on the monthly living expenses expected.
| Living Expenses Per Month | Emergency Fund (3 Months) | Emergency Fund (6 Months) |
|---|---|---|
| £500 | £1,500 | £3,000 |
| £750 | £2,250 | £4,500 |
| £1,000 | £3,000 | £6,000 |
| £1,250 | £3,750 | £7,500 |
| £1,500 | £4,500 | £9,000 |
Where Should I Save It?
As stated above, it’s important to ensure that your emergency fund is highly liquid. I.e., it can be accessed easily and quickly. There are a few ways you could save, some of which will even help offset the effects of inflation:
- Keeping the money as cash in a Current Account, but taking advantage of bank-switch offers (which pay anywhere between £20-£200)
- Saving the money in a high-interest savings account which does not charge you for withdrawals
- Saving the money in a Cash ISA, which usually offer a reasonable interest rate
- Buying Premium Bonds, again earning ‘interest’ via their lottery-style system
If you’re struggling to start saving, there are also some fantastic UK banking apps out there which can help keep you motivated. Starling, Monzo, Plum and Chip are just four examples, which offer a range of features from automatic rounding to savings challenges, AI-based automatic savings, and much more.
