How to Build an Emergency Fund From Scratch
By C.G. Handley
An emergency fund is money set aside for unexpected costs, such as a broken boiler, a vet bill or a sudden drop in income. Even a small one can stop a surprise bill from turning into debt. Starting is the hardest part, so the aim is to make it small and routine.
How much do you need?
You will often see advice to save three to six months of essential spending. For many people that is a long-term goal, not a first step. Start with something achievable, such as £100, then a month’s rent and bills, then work upwards. Each milestone makes you more resilient.
Step 1: Work out your essentials
Add up the monthly cost of housing, food, utilities, travel, insurance and minimum debt payments. This is the figure your fund needs to cover, and it will often be lower than your normal spending.
Step 2: Open a separate account
Keeping emergency savings apart from your current account makes them harder to spend by accident. An easy-access savings account is usually the right place, as you can withdraw the money quickly. Compare interest rates, and check that the provider is covered by the Financial Services Compensation Scheme, which protects eligible deposits up to a limit.
Step 3: Save on payday
Set up a standing order for the day after you are paid. Even £5 or £10 a week is worth it, because the habit matters more than the amount. If your pay varies, save a percentage rather than a fixed sum.
Step 4: Find extra pounds
- Round up purchases, if your bank offers a feature for it.
- Put any refund, bonus or double-pay month into the fund.
- Sell items you no longer use.
- Cancel a subscription and redirect the saving.
- If you are eligible, look at the government’s Help to Save scheme, which adds a bonus to regular savings.
When to use it
Decide in advance what counts as an emergency. A car repair or loss of income qualifies, but a sale or a holiday does not. If you use it, top it back up as soon as you can.
Balancing savings and debt
If you have expensive debt, you may wonder whether to save or repay first. A common approach is to build a small starter fund, then put extra money towards the highest-interest debt, then return to a larger fund. A free adviser at MoneyHelper or StepChange can help you choose.
Building a fund takes time, but each pound makes the days before payday a little less stressful. For help keeping to a plan, see our 50/30/20 guide.
This article is for general information only and is not financial or legal advice. For personal guidance, speak to a qualified adviser or an organisation such as MoneyHelper, Citizens Advice or ACAS.