Emergency money: How to plan for the unexpected

Building up a buffer to cover unexpected bills is something we should all be aiming to do. Small savings here and there can keep you steady when a surprise expense crops up.

If the past year has taught us anything, it’s that unexpected things happen. Furlough, a word many of us hadn't even heard of before the pandemic, is now common parlance.

But for many of us, financial emergencies are nothing new. In steps the emergency fund — a pot of money you put aside to help weather the unexpected.

How much do I need?

Start by writing an honest monthly budget. Work out exactly what your essential living costs are — that’s things like utility bills, insurance, food, transport, council tax and your rent or mortgage. It doesn't include subscriptions to streaming services or clothes.

Financial experts advise that we should have a buffer of at least three to six months’ worth (Opens in new window) of expenses saved up, but don't worry if you're one of more than 20m adults in the UK (Opens in new window) that don't. It's never too late to start.

How do I start?

Open a separate account, and pop some money in it. Using your budget you've figured out how much it would cost you to live for one month, so aim for that much first. Give it a distinctive name if you like — you might feel tickled each time you pay into a 'Future me' or 'Escape to the circus fund'. Once you've achieved that first month goal, try again until you have three, and then again until you have six.

Don't feel pressured to save a huge sum right away — paying in anything is how it begins. You might want to put aside a little bit every day or pay your emergency fund first when you get paid. Work out what you can afford and try not to be tempted to dip into your emergency fund for your usual outgoings. Every pound you can save is a step towards making your emergency fund real.

If you’re lucky enough to get any unexpected money, like a refund or an insurance payout, put some of it into your fund for a big boost.

Debt vs emergency fund?

If you have debts to pay it might feel like a big ask to set money aside for an emergency fund. As savings currently don't earn much in the way of interest, while credit card debt could be costing you hundreds of pounds a year, it makes sense to consider paying down your debt before starting a fund. Once you're able to have an emergency fund at the ready, it could prevent you from getting into debt again when something unexpected happens.

Where should you keep it?

Your emergency fund needs to be accessible, but not so accessible that you’re tempted to spend it. You should consider opening a separate account for this fund. Think about how easily you would want to access your emergency fund (or parts of it) and make sure to check the small print of any account to understand if there are any charges or loss of interest if you need to get to it.

Many savings accounts in the UK currently pay very low-interest rates, but remember that this money is not necessarily about growth, it’s about covering you in an emergency.

What happens when I need it?

You use it. Without guilt and with perfect peace of mind that this is exactly why you saved up in the first place. Surprises happen in life, and while some might cost you a week’s salary, others might cost several months’ worth. Being able to turn to your emergency fund rather than a credit card or loan, may help protect you from the stress of further debts, that, thanks to interest, can be harder to get on top of. Plus, by now you should hopefully have the right saving habits in place, and the confidence that you can build your buffer back up again.

Disclaimer: This article is for information only and does not constitute financial advice