At some point or another, all of us will have faced an unexpected bill or expense in our adult lives. For me and my partner, a big one was our 92 year old land lady deciding that she no longer wanted to rent out her flat.
This left us quickly having to pull some money together to put down a deposit, a month’s rent, and associated fees before we got the deposit back from the previous flat- all before pay day.
It was a tough and unexpected change, but we were fortunate enough to have some money stowed away for this eventuality- our emergency fund.
What is an emergency fund?
The idea of an Emergency Fund was popularised by Dave Ramsey, an extremely popular and successful American expert on personal finance.
An emergency fund is a sum of money which can easily be accessed in the event of an unexpected expense or an emergency. This could be anything from being made redundant, suddenly having to move house, or an unexpected bill.
Ideally you will keep your emergency fund in a separate bank account to your current account, and it should be instantly accessible. Mine is in a bank account which is literally called an ‘Instant Access Saving Account.’
It shouldn’t go on things like a holiday, last minute gifts for people or treating yourself- hopefully you already have a budget plan with money set aside for these kinds of eventualities, and if you don’t, you can check out my guide to budgeting.
I’ve used my emergency fund to pay for dental work before. I went to the dentist and it turned out I needed £400 of dental work done. I could have opted to have the ‘amalgam’ filling (grey coloured filling to you and I), but it would have been visible when I smiled and, honestly? I was too vain to have a chunk of grey showing on my teeth for the rest of my life.
If I didn’t have my emergency fund I would not have been able to choose the more expensive white fillings, without putting them on credit, and would have found myself in quite the pickle.
Why do I need an emergency fund?
You need an emergency fund to protect yourself. As well as covering unexpected expenses and avoiding credit, it can also give you a buffer if you find yourself in a situation that you need to escape. Whether that’s a job that is making you seriously unhappy, or a cohabiting relationship that has ended- having a cushion of money to enable you to leave these kinds of situations can make a huge difference to your life.
In 2016, homeless charity Shelter estimated that over 30% of British families are one paycheque away from losing their homes. Many families could not cover housing costs for more than a month in the event of job loss. That is a very frightening reality, and an emergency fund can help you avoid utter turmoil if you did come into financial hardship.
I spoke to some other UK Money Bloggers to find out when their emergency fund has really saved them from financial difficulty…
Kara from Your Best Friend’s Guide to Cash
I’m self employed as a freelance journalist and I used mine in the spring/summer when I was unwell and attending lots of hospital appointments which meant I missed loads of work.
One week alone I saw consultants five days in a row, so it didn’t take long to have a massive impact on my finances.
Had I not had the cash set aside, it would have made an already difficult situation much more stressful and it was such a relief to not have to worry about the loss of income.
Income Protection insurance is great for after you have a diagnosis, but the period where you are having the investigations themselves can cost you a fortune if you work for yourself.
Hayley from Miss Many Pennies
I’m using my Emergency Fund right now! – The auto glass man is outside my house fitting a new windscreen after a stone hit it the other day when I was driving and made a massive crack.
Glad we have the money saved to just get it replaced without having to worry about finding enough just after Christmas.
Katie from Student Skint
I lost my job unexpectedly (went to work one day and was unemployed by 1pm!) and didn’t end up starting a new job for 2.5 months then wasn’t paid until the next payday so I had to go without an income for over 3 months, a quarter of the year.
My savings were more than enough to keep me afloat for a while so I didn’t feel pressured to get a new job straight away and I could be fussy with finding the right one as I knew my bills and expenses were covered (plus more than enough spending money) for the next few months.
It was so liberating! But likewise, I knew if I didn’t get a new job by a certain time I’d have to find another income source before the saved money ran out!
Simon from Pennies for the Piggy Bank
We used our Emergency Fund last year when we moved house. We were originally planning to put our estate agent fees on an interest free credit card rather than dipping into savings.
But, when it came to pay the bill we were told they wouldn’t accept credit cards only bank transfer. It was a good job we had an emergency fund to cover it!
Karyn from Miss Thrifty
Karyn was pleased she had an emergency fund when not one, but three unexpected expenses came up in the space of a week- a bust washing machine, a gas leak and slashed tyres meant that she would have had to put all of these expenses on credit- but luckily had the peace of mind of an emergency fund.
An emergency fund ultimately gives you options. It gives you the peace of mind that if you were to lose your job, your car was to break down, or you needed to take some time out to care for a loved one, that you wouldn’t come into any financial hardship because of it. It gives you a certain financial freedom that’s good for both your financial health and your mental health.
How much should I save for an emergency fund?
How much you decide to save for an emergency fund depends on your circumstances. In the most ideal world, you would have 3-6 months expenses saved up. But even having 1-3 months of living expenses saved could really help you in an emergency.
You should consider how many dependants you have- are you the sole earner in your family? Do you have children? Pets? You will need to consider their needs as well as your own when you are deciding on the amount you need to save for your emergency fund.
Within these monthly expenses you should cover everything from rent/mortgage payments, to bills, food, travel and other day-to-day costs. Go through your bank statements to find out what you really spend in a month- that is what you will need to save for a month’s worth of emergency fund.
You might also enjoy: my saving journey: how I’m saving up for a house deposit in London
Should I save an emergency fund if I’m in debt?
In theory, yes. You should save an emergency fund if you are in debt. Saving a small emergency fund over time means that you have a buffer should you have an unexpected expense. This way, you can dip into this fund instead of going further into debt to cover an emergency.
If you are paying off debt, a great starting amount for your emergency fund is £1000. This is of course a lot of money, especially when you are trying to pay down the amount you owe. However, it is important to gradually build this in any way that you can so that if an unexpected expense comes up, you have another option rather than putting it on credit.
You could try using an app to help you put money away for the future- you could try Chip which connects to your bank account and uses artificial intelligence to monitor your spending and then stashes small amounts of cash away for you. You won’t even notice! You can get started using this link, and my code THRIFTYLONDONER10 for a free £10 bonus.
If your budget is watertight, you are paying off debt and you have no money left to go towards an emergency fund, you could try to make some extra money on the side to build up your fund. If you’d like to find out more about making extra money, you can head to my guides on how to make extra money in London (with lots of ideas that can be applied if you don’t live in London!), how to make money fast, and how to make freelance writing your next profitable side hustle.
What should I use an emergency fund for?
You should use an emergency fund for emergencies only- just like the name suggests. It should be used when an expense is unexpected, and needs to be paid quickly.
It can be used for anything that you deem to be a necessity that cannot be budgeted for, and cannot be covered by your normal monthly paycheque.
It can certainly be hard to save up for an emergency fund, especially if you have debt, or you are already saving up for a house deposit and would rather put all of your money towards your goal.
It can be difficult to part with that money each month and put it aside for seemingly boring expenses like car repairs or an out of hours plumber. But, in the end, an emergency fund can really help you to make the best decisions for yourself and your circumstances.
For me, an emergency fund gives me the peace of mind that if one of my parents got ill, I would have the money to either up sticks and move back to my hometown, or fly back and forth as much as I wanted to. It gives me the sense of security that if I was made redundant, I could wait for the right position to come up whilst using my savings to support myself.
It’s all about having the freedom and security that money can bring you- even £1000 can make a huge difference to your circumstances if an unexpected expense or emergency rears its ugly head.