What is an emergency fund?

Saving up for a rainy day means putting money aside that you can dip into if you need cash in an emergency. It could cover expenses like:

  • Car repairs

  • House repairs

  • An unexpected medical bill, e.g. emergency dental treatment

  • Paying for basics if you lose your job

  • Paying your bills if you are unable to work for health reasons

Do you need one?

If you can afford to save a little a month and would not be able to afford the above costs from your wages, it's worth saving an emergency fund.

But it might not be worth it if:

  • You don't earn enough to put any money aside

  • You have more urgent costs to cover like debts

  • You have insurance policies that cover emergencies

How much should you save?

An emergency fund should be enough to pay all your most important bills for several months.

Three months of your usual wages or income is a good minimum amount to aim for.

The exact amount you need depends on your circumstances; for example, you may need more if your partner or children rely on your income.

How to save

The best way to build up an emergency fund is by saving money every time you are paid, e.g. monthly.

The easiest way is by setting up a standing order for a certain amount or a sweeping service. This can move any money you have left at the end of the month from your current account to your savings.

Keep it in a separate account

Keep your savings separate from your main current account so you can:

  • Keep track of how much you have saved up

  • Make sure you do not accidentally spend your savings

  • Earn interest to boost your balance

Choosing an account with a high interest rate means your savings grow quicker, but fixed rate bonds are usually unsuitable. They often don't let you withdraw until the end of the fixed term, even if you need the money in an emergency.

An instant access savings account lets you withdraw some or all of your money whenever you need it without fees or interest penalties.

You could get a higher interest rate by opening:

Pay in extra when you can

As well as paying in regularly, you can boost your savings if you get extra money from:

  • A raise or bonus at work

  • Paying off a loan or credit card, leaving you with more money available each month

  • A tax refund

  • An inheritance or another financial gift

You could pay this extra money into your savings to build up your emergency fund quicker.

Alternatives to saving

Pay off your debts instead of saving

The interest you pay on your loan, credit card or mortgage is likely to be much higher than the interest you can get on a savings account.

This means paying off your debts could save you more money than a savings account could make you in interest. But raiding your savings could leave you short of money in an emergency.

Here is how to decide if you should pay off your debts with your savings.

Cover your costs with insurance

You can pay for some emergency bills with an insurance policy instead of saving up to pay them yourself. You can cover:

  • Health problems with critical illness cover, which can cover your bills if you are too ill or injured to work, or health insurance, which can pay your private medical bills

  • Losing your job with income protection insurance, which can cover your bills if you become unemployed or are unable to work

  • Expensive property bills with home insurance, which can cover your possessions or your property

  • Car repair bills with car insurance, which could pay out for damage caused by accidents, theft or vandalism

Insurance policies can make covering a large cost more manageable. But you do not get the money you pay for the policy abck if you do not need to claim.

Other ways to cover unexpected costs

If you do not have enough money to pay a bill you could also use a:

These can all be expensive, but using an interest free overdraft or a credit card with a 0% deal on purchases could let you borrow for free, as long as you pay it back in time.

If you get a loan, here is how to work out the cheapest way for you to borrow money.