How to Make an Emergency Fund and Why You Need One

Set a goal

You should aim to have 3 to 6 months’ worth of essential expenses (usually around 80% of your take-home salary) to cover things like rent/mortgage, food, utilities, and transport.

Create a budget

Take your monthly take-home income and split it into 50% needs, 30% wants and 20% savings. The 20% should go towards building your emergency fund once any outstanding debt has been paid off. This is not the only way to budget for an emergency fund so make sure you do your research.

Automate your savings

Set up an automatic transfer to your emergency fund each payday. This removes the temptation to spend the money elsewhere.

Start small and build gradually

Don’t despair if you can’t afford 20% of your salary just yet. Anything is better than nothing and consistent saving will always build up over time.

Use windfalls

Bonuses, tax refunds, inheritances, or unexpected cash gifts can be excellent opportunities to boost your fund.

Ever put your car in for an MOT only to be told that you need to spend a significant amount of money to get it back on the road? Or have you been made redundant and wondered how you will pay the rent until you find another job?

Well, an emergency fund takes the sting out of life events that have a financial impact. It’s essentially a safety net that allows you to handle emergencies with minimal stress and free from the interest that comes with debt.

You need to be able to access your emergency fund when things go wrong. However, you should also have all your money working as hard as possible towards growing your wealth.

You also need to ensure that this money is kept completely separate from your regular accounts.

Here are some options:

• High-interest savings account

This would be my top pick and where I keep my own emergency fund. You can get your hands on your money instantly (make sure it’s easy to access) and it will earn interest and grow while you forget about it.

• Cash ISAs

Cash ISAs offer interest so you can beat inflation but will also protect any gains from the taxman. Check our list of the best Cash ISA rates here.

• Avoid investments

Investing your money usually results in higher returns (when done right), however, in order to ride out market volatility, it is always suggested that you leave invested money in the market for a minimum of 5 years.

• Financial security: This can have a massive impact on your mental health and help manage stress.

Avoid debt: Financial emergencies often lead to borrowing and debt, which in turn can become difficult to manage as interest kicks in.

Protect long-term financial goals: Avoid dipping into investments and savings goals, keeping you on track for your goals.

• Car or home repairs: For repairs that can’t wait, your emergency fund can be used. Just ensure that you aim to replace any funds used as soon as you can.
• Loss of salary: Should you lose your salary for any reason, your emergency fund can be used for household expenses.
• Medical bills: Anything not covered by the NHS or insurance can be paid for with your emergency fund.
  Do not be temped to use your emergency fund for something like a holiday. That is not an emergency and should be saved for separately.

An emergency fund is one of the most important tools in your financial arsenal. It protects you from life’s curveballs, keeps you out of debt, and ensures you stay on track to meet your long-term goals.

Start small, stay consistent, and watch your safety net grow. Your future self will thank you.

Anything we haven’t covered? Get in contact and let us know.