The Emergency Fund

6 Apr 2022

One lesson I quickly learned about approaching my finances was, as writer and columnist Laura Whately describes, that successfully managing my budget “is clearly not just a practical, and rational thing, but an emotional one too.”  We don’t always make rational choices about our money, and not all our behavioural choices with money can be explained with sound reasoning. We often buy things we can’t afford, to impress people we don’t know and so the saying goes.

When I first earned money as a teenager working part-time, the only real lesson I was taught was that I should “save” my money. This sounds sensible, but what am I saving this money for? At best the response was a “rainy day”. The problem with the “rainy day” is that it is very subjective, and more importantly it is completely abstract. It’s difficult to save for something so intangible, and to save indefinitely for a rainy day is downright poor advice.

It is however, crucial to firstly establish an emergency cash fund to protect us against any unforeseen costs we can’t avoid. Most people in the UK, especially young people, resort to using their credit cards or taking on other expensive debts in these instances. This is why many people, even in full-time employment are unable to increase their savings and improve their financial futures. 


Why do I need an Emergency Fund?

The Emergency Fund is the bedrock of a secure financial future for everyone and should always be maintained, but we need to be clear on why we are saving and how much we actually need.

The number one reason people in the UK find themselves falling into a cycle of expensive debt is because they resort to credit cards, payday loans, and personal loans when an unforeseen emergency hits.

The Emergency Fund is our personal insurance policy against any unexpected bills or loss of earnings, and it means we don’t have to resort to taking on more debt to get by.

The Emergency Fund is a cash fund; we don’t need this money to be working for us. The funds need to be easily accessible, so it isn’t appropriate to invest this money, or to begin investing until we have a sufficient emergency fund saved!


How much do I need?

Beginner: If you have a lot of outstanding personal debt which makes it difficult for you to save anything. Make sure that you are paying at least the minimum contribution on all those debts, and then try to save £1000 in total, or £500 if that is more realistic and spread this target over a suitable time frame. Then focus on paying down your debts before returning to your emergency fund.

Once you have your starter emergency fund saved up, this lifeline is there to stop you taking on more bad debt, so put it aside and only use it for emergencies (we’ll get into this shortly).


Intermediate: Calculate how much your total fixed outgoings (your liabilities) are on a monthly basis. This includes your rent or mortgage payments, your council tax, utilities and phone bill and any other fixed monthly liability you have. The total figure is how much you must pay each month in living expenses before you have made any discretionary purchases with what’s left over.

Aim to save the equivalent of three to six months’ of your total living expenses, to provide a financial buffer against any unforeseen emergency/disaster.

If your total monthly liabilities cost £1200, then you should save £3600 for a 3-month buffer. If you are more risk averse, and it would make you feel more comfortable keep on saving up to £7200.

Remember, this money is just being put away for emergencies. We don’t need this money to work for us or make a huge deal more money; this is our emergency fund, for emergencies only.


Advanced: If you are further along your savings journey and have already made some investments you are comfortable with, then you may want to add to your emergency fund. You can extend your emergency fund buffer to a year (or more). So, if any tragic incident occurred resulting in a loss of earnings, you know that you have insured yourself for at least a year.

If you are lucky enough to be in this position, we’d usually recommend that you have targeted some of your savings for other purposes before coming back to top up your emergency buffer.


What counts as an emergency?

Using your emergency fund really is a last resort, it’s our personal insurance policy against falling back into debt cycles and resorting to credit cards for the wrong reasons.

Use your own discretion for what these emergencies may be for you but here is some guidance on what we believe constitutes an emergency, and more importantly, what does not.

Car repairs, home repairs like a broken boiler, job loss, vet bills and family emergencies are all unfortunate instances where we should refer to our Emergency Fund to bail us out, and not turn to our credit cards.

Holidays, recurring annual expenses like car insurance and taxes, or even money to finance a side hustle are not good reasons to use your Emergency Fund. Remember this is a fund we want to carry throughout our lives as our personal insurance policy against bad personal debt.

We should, however, be saving for these expenses too, but separately from our Emergency Fund. Our Emergency Fund is the foundation to our savings, and once we have established this we can confidently look at saving and investing our money towards other goals and building long-term wealth.


Where shall I put my Emergency Fund?

The Bank of England reduced its base rate to 0.1%, which means it isn’t a great time for savers. With this reduction, most of our savings will have minimal growth in savings accounts, but this is our Emergency Fund so we don’t need it to be growing significantly, or at all, for us. The most important thing is that it is easily accessible.

That being said, putting it into a separate account is much better than leaving it in your main current account because:

If your money is left in your main current account, you are more likely to spend it. This comes back to our psychology and behaviour concerning our money. I found that opening multiple accounts and moving my money to different accounts, serving different purposes, gamified my financial planning and made me much less likely to dip into it.



Establishing an Emergency Fund won’t directly create any long-term wealth, but it is arguably the most important savings pot to establish first and foremost. If you rush and invest all of your money too quickly, one small emergency can derail your financial plans completely – you may be forced to sell early and cash investments in too early, or even take on more expensive debt and thwart your savings goals. Having a solid foundation in your emergency fund will allow you to confidently invest your money, and work towards generating wealth for the long term.