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How Much Emergency Fund do you Realistically Need?

If the turbulent past few years have taught us anything, it’s that significant unforeseen expenses can occur without warning when we least expect them. For this reason, it’s prudent to keep money aside for a rainy day.

How much emergency fund UK savers should build in advance of these events will depend on their circumstances, such as how much they earn and their typical monthly outgoings.

Read more to find out what an emergency fund is, why you should have one, and how much you should aim to save.

What is an emergency fund?

As the name suggests, an emergency fund is a pot of money you have set aside for any sudden emergencies that may occur, such as:

  • Home repairs
  • Car breakdown or an unexpected repair
  • Losing your job
  • Having to replace appliances, such as a broken washing machine
  • Large vet bills

Instead of taking loans and getting in debt when these unexpected expenses arise, the idea is that you can dip into your emergency fund to help cover unforeseen bills without damaging your longer-term financial security.

Having a solid emergency fund ensures that you’re prepared for any financial shock that may unexpectedly occur. It will also help avoid any added pressure on your income since you won’t have to pay back any borrowed money later on.

How much cash should you save in your emergency fund?

The amount of money you should save in your emergency fund depends on your individual circumstances.

Generally, a good rule of thumb is that you should aim to save between three and nine months’ worth of household expenses. This should be enough money to cover any emergency or period of unemployment that may arise.

For example, if your monthly essential expenses equate to £1,500, you should aim to save anywhere from £4,500 (for three months’ worth of expenses) to £13,500 (for nine months’ worth of expenses). The more you have saved, the more peace of mind your emergency savings will give you.

Although three to nine months is a safe bet, it may be worth saving even more depending on the number of people living in your household, their contribution to monthly expenses, and how secure your source of income is.

Certain situations may even potentially warrant saving 12 months’ worth of essential expenses. A good example of this is if you have a niche job and it may take some time to find a new role if you were made unemployed.

With an emergency fund as a safety net, you would have more time to comfortably search for a new job without feeling pressured into taking the first opportunity that comes your way, just so you can pay the bills.

If you have a family with children that rely solely on your income, it may also be a good idea to build up a fund to cover 12 months’ worth of expenses.

Emergency funds when you’re retired

When you’re retired, an emergency fund plays a hugely important role in protecting your retirement income.

There are lots of reasons why you may want to keep a bigger emergency fund – perhaps one- or two-years’ worth of expenses – if you are retired.

Firstly, having a cash buffer in place means that you have the option of drawing an income from your cash savings during volatile market conditions. Doing this may mean you can leave your pension invested until markets recover, protecting the value of your fund.

Additionally, during your retirement it’s typically harder to generate additional income to fund the cost of unexpected bills. While you’re working you may be able to do overtime or generate additional income to cover expenses, but this is likely to be harder once you retire.

In addition, you may encounter more unexpected costs during your retirement. Health-related home improvements, for example, may suddenly become necessary or you may have to pay for additional care.

If you need extra money in a pinch and have to take it from your pension as you don’t have a solid financial cushion in place, you may not then have enough to fund your desired lifestyle.

How should you start to build an emergency fund?

1. Calculate your expenses

Firstly, it’s a good idea to figure out your monthly expenses. This will give you the baseline amount you should aim to save.

When deciding how much to save in your emergency fund, you should include all essential monthly outgoings such as food, mortgage repayments, Council Tax, gas and electric bills, and any other utility bills. You don’t have to save all your spare money every month, but making payments in small lump sums can help you reach your target amount – even small amounts of savings paid in can make a big difference.

If your savings target, and consequently the amount you save every month, seems too high, it’s worth starting with smaller monthly payments then slowly increasing your payments. The important thing is that you develop a decent savings habit, rather than just aiming to build a large fund – something is better than nothing in this case.

2. Create a concise plan

Before you start saving, it’s worth creating a clear and thorough plan about how you will save, and what constitutes an “emergency”.

If you’re dipping into your fund every time you want to pay for something, you may not have enough to protect yourself from a true emergency when it happens.

For example, if you use your emergency cash to purchase a new car, you may not then have sufficient money in your rainy day fund to cover an emergency when one occurs.

It may also be a good idea to set a goal date by which you would like to have built up your fund. This may encourage you to save towards your target.

3. Decide on an account to save in

Next, you should shop around for different savings accounts where you will hold your emergency fund.

You should aim to choose an account that allows you to immediately access your money, such as an instant-access savings account or a Cash ISA.

It may also be prudent to open an account with a different provider than your normal current account. This should make it more complicated to transfer or spend your savings, thus reducing temptation.

4. Start saving regularly

Now, you’re finally ready to start making regular savings contributions towards your emergency fund.

It may be wise to set up a monthly standing order that occurs the same day you get paid. Not only will this reduce your risk of spending the money before it’s safely in your emergency fund, but making your savings feel like another monthly commitment will help you see it as a “bill” that needs paying.

If you are still unsure of how much you should be saving, or the best way to start saving money, it may be wise to contact a money advice service.

Where should you hold your emergency fund?

The most important aspect of an emergency fund is that your money can be accessed quickly and easily. This is so that, when an emergency does happen, you’re able to respond almost instantly without being restricted by your provider.

A current account may be a good option to hold your emergency savings – they’re easy to use and don’t require a notice period to withdraw money. It’s important to keep in mind, however, that some providers may require a certain amount to be paid in each month, or may require you to set up a direct debit. You may also earn next to no interest on your savings, and the money could become confused with your normal monthly spending.

You could consider an instant-action savings account. Most banks and building societies offer this type of account which pays a small rate of interest in return for immediate access to your savings. This may be branch-based, or you may get a slightly higher interest rate with an online-only account.

Another option could be an instant-access Cash ISA. These allow you to access your money instantly and don’t require a notice period before withdrawing, meaning you can deal with an emergency as soon as it arises. You should check interest rates from different providers before opening an instant-access Cash ISA, however, as rates can vary.

Also consider: Will interest and savings rates rise in 2022?

Could you have too much money in your emergency fund?

It’s difficult to imagine that having too much emergency cash could be a bad thing, but having more than you realistically need in your fund could mean you’re losing out on interest or growth.

One of the consequences of using an instant-access savings account is that you might not receive the same level of interest as other types of account. You sometimes sacrifice part of your potential return for the convenience of instant access.

This means that your emergency savings could lose some of its value in real terms over time due to inflation.

When the interest rate from your savings account is lower than the rate of inflation, any money sitting in that account will lose value over time in real terms and your purchasing power is decreased.

This is why you should only aim to build up however many months’ worth of household expenses you decided on in your fund. The more money you have in your emergency fund, the more value your money could lose after taking inflation into account.

In fact, inflation hit 5.5% in January 2022 and experts predict that it could climb to 8% this year alone. As the inflation rate continues to increase, prices across the board will likely climb, from your weekly food shop to utility bills.

So, not only will any funds held in savings accounts with a rate of interest lower than the rate of inflation lose real value, but you may also have to increase the monthly amount you need to save in the first place.

Inflation is an unavoidable aspect of saving, though there are steps you can take to restrict the damage done to the real value of your emergency fund.

How can you limit the effects of inflation on your emergency fund?

To begin with, you should make a habit of regularly shopping around for different savings account providers. If you can find an account with even slightly higher interest rates, you could boost the value added to your emergency fund.

It may also be wise to try to avoid saving more money in your rainy day fund than is necessary. When you have reached your emergency fund’s saving target, you should then think about saving further money into a savings account with higher interest rates.

Fixed-rate ISAs, for example, typically have higher rates of interest at the cost of not being able to withdraw your returns before the account matures. It is this higher interest rate that can help you negate the effects of inflation on your emergency fund.

Any excess savings could also be placed in a Stocks and Shares ISA – investing through the stock market typically exposes your savings to greater growth potential in the long term. As a result, you may be able to offset the impact of inflation on your emergency fund and help your money retain its real value.

You should keep in mind, however, that investing comes with its own dangers and may not be right for you depending on your tolerance for risk. Remember that the value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.



Are 12 months’ expenses too much for an emergency fund?

This depends on your current situation.

If you have a family with children that relies on your income, or you have a niche job and it would be tricky to find another role quickly if you lose your job, then it would be completely warranted to save 12 months’ worth of household expenses to cover any eventuality. You may also want to hold 12 months’ expenses if you’re retired.

Otherwise, it may be wiser to save somewhere between three and nine months’ worth.

Should I still save money for an emergency fund when I’m in debt?

Even though emergency savings are important, you should ideally pay off any high-interest debt before you start building an emergency fund.

This is because, simply put, your debts cost more than your savings earn, so it can be worth dealing with expensive debt immediately.

Are my savings protected in an emergency fund?

The amount of protection your money receives depends on the provider of your savings account. If they’re covered by the FSCS (Financial Services Compensation Scheme), then your savings will be protected up to the value of £85,000.

If you already have savings close to the value of £85,000, it may be worth splitting your emergency fund between more than one provider so the protection still applies.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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