How to start your emergency fund

Life has a way of throwing unexpected costs our way, whether it's a car repair, a broken oven or a sudden drop in income. An emergency fund gives you a cushion for moments like these so you're not left in a panic or relying on debt. Here's how to build one, step by step.

What is an emergency fund?

An emergency fund is a sum of money designed to cover unexpected expenses, from replacing your boiler to keeping your household up and running if you can't work due to an accident or redundancy.

It should be cash that's reserved for urgent situations when you're in a tight financial spot. To boost your pot and make withdrawals when needed, you can store your funds in a savings account with a strong interest rate and easy access.

Starting to save an emergency fund is also an important way to support yourself if you are in a tough situation financially.

It can go a long way to easing any concerns you have should a hefty bill or surprise expense pop up too.

How much should you have in your emergency fund?

Your emergency savings fund is personal to what your monthly income and outgoings are, but experts suggest having enough to cover at least three months - or if possible six months - of living expenses.

Here’s how to work out your emergency fund amount:

1. Add up your essential monthly outgoings, including your rent or mortgage and any bills

2. Multiply this figure by three or six depending on the size of your planned emergency fund 

For example, if your monthly outgoings are £2,000, aim for £6,000 in your emergency fund to cover your expenses for three months, or £12,000 to cover six months.

The best way to reach those amounts is by making consistent payments into your savings account.

Paying £300 a month would take 20 months to cover your expenses for three months, while if you wanted to have £6,000 set aside within a year, you'd need to put away £500 each month.

How to start building an emergency fund?

Building an emergency fund might seem like a big task based on the figures above. But even a small emergency fund can help get you out of a tight spot if an unwelcome expense needs to be paid or you go through a period of not working.

The most important thing is to get started as soon as you can – and to keep topping up your account when you have to spend it.

Here are three useful steps to follow to help build your emergency fund:

1. Add up your spare cash

Work out how much cash you can contribute to your emergency fund each month. If you don’t have any money to spare, look at where you could cut back to free up some cash. For example, shopping around for cheaper energy or internet provider.

2. Find a savings account

Open a savings account that pays a competitive rate which offers instant access to your money when needed. As these funds are designed for emergencies only, it’s sensible to keep them separate from your everyday spending money and any other savings you may have, but also readily available if you need it.

3. Standing order

Set up a monthly standing order from your current account to your emergency fund savings account. As with important payments such as your mortgage or rent, the best time to schedule these outgoings is a few days after your wages go in. That way, if there’s a slight delay in receiving your salary you will not be impacted. And if there’s any money left at the end of the month, you can always top up your emergency fund again.

Emergency fund saving tips

Here are a few handy tips:

• Making regular small contributions to an emergency savings account is usually easier to commit to than paying in larger amounts from time to time. Also, this approach will often allow you to build a larger emergency fund over time

• Check your emergency fund every year to ensure it is at the level you want it to be

• Automate your contributions with a standing order, so saving happens without you having to think about it each month

• Keep your emergency fund in an easy-access savings account so you can get to it quickly without penalties when you actually need it

• Set a clear target so you know what you're saving toward

• Keep it separate from your everyday spending account so you're less tempted to dip into it for non-emergencies

• Top it back up as soon as you can after using it, so you're covered if another emergency follows

If you are currently struggling with debt, it might be better to cut down on that debt before exploring a savings plan.

You can always get free, impartial advice and support from Government-backed services including Money Helper and Citizens Advice.

Where should you save your emergency fund?

You never know when you will need to dip into your emergency savings, so the best place to save them is in an easy access savings account.

Many instant-access accounts offer a variable interest rate which means the rate can rise or fall over a period of time.

If you want to save for an event or a purchase that you know you won’t need to access to, then a fixed rate savings account might suit better as you'll be guaranteed the same rate for that time.

The disadvantage with a cash ISA is that any money you pay in and then take out will still count towards your annual ISA allowance for that year.

Our comprehensive series of guides can help you explore all the various savings options and explain which ones best suit different savings goals.