What is an Emergency Fund?
4 Min Read | Published: 18 November 2024
Written by American Express
There will always be times in life when unexpected expenses pop up. Your boiler breaks, you want to help out a family member or something goes wrong with your car, perhaps. This is why it’s a great idea to have emergency money. This article will give you tips on how much you should have in an emergency fund, saving tips and why it’s so important.
Understanding the importance of an emergency fund
Life’s full of surprises – some lovely ones and others which are a little trickier. If we know we have money stored away to get us through the more difficult times, we can relieve some of life’s stress and worry.
Benefits of having an emergency fund
The main benefit of having an emergency fund is peace of mind. You know you won’t have to worry about paying your bills if you lose your income or have a big purchase to make suddenly. It also means you won’t have to borrow money, which could potentially end up with you having a lot of interest to pay.
How much should you save?
When thinking about how much you should have saved for emergencies, a good rule is to make sure you have enough money for three to six months of living expenses.
To work out how much of an emergency fund you should have, start by researching your outgoings. Go through your bank statements and see how much you spend each month on bills, food, transportation, mortgage or rent and other essentials. Once you know exactly how much you need each month, you can calculate what this would be for three months or more and start saving up that amount.
Options for savings in the UK
Shop around to find a savings account with the best interest rate. This means if you’re lucky enough not to need your emergency fund for a few years, you can earn money on it.
You can also put savings in an investment account, but for an emergency fund this is probably not the most sensible option. Experts recommend you should only invest if you can afford to wait at least five years before taking out the money. An emergency fund needs to be readily available.
Want more advice on planning your financial future? Read our guide.
Accessibility vs Returns on savings
An emergency fund should be easily accessible, as its purpose is to cover unexpected expenses. Higher interest and investment accounts tend to be harder to withdraw funds from, so they’re not the ideal place for emergency funds. However, this could mean you aren’t making as much on your savings as you might like.
Once you have a certain amount in your emergency account you won’t need to keep adding to it, unless your monthly expenses increase. This means, if it’s doable, you can have a separate savings or investment account to accumulate money for the future once your emergency fund is set.
Building your emergency fund over time
As with any savings, you’ll probably need to build up your fund over time, putting a little aside each month. As you’ve calculated out how much you should have saved for emergencies, work out what you can afford to put away and therefore how much time it’ll take to build up your fund.
Strategies for regular savings
If you can, set up a standing order to go into your emergency fund, even if it’s small. A regular amount really starts to build up. If you don’t have any spare cash, look at your bank statement and see if there’s anything you can cut back on to add to the fund.
Remember, it’s the difference between being able to pay the bills in an emergency or potentially finding yourself in a very difficult situation, so it’s important to prioritise. Be honest with yourself about where you could spend less.
How much should my emergency fund be?
Your emergency fund should cover all your living expenses for at least three months.
Where should I keep my emergency fund?
You should keep your emergency fund in a separate account. It needs to be easy to access in case you need it in a hurry.
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