Setting aside money for a rainy day can help tide you over in times of challenge and provide financial security when in need of it.
What is an emergency fund?
This is money you save to one side to pay for unexpected costs, whether that’s a bill you hadn’t planned for or a change in your circumstances, like losing a job or being unable to work due to illness.
This cash is often also called ‘rainy day money’.
Why you should have an emergency fund
If you have money set aside for emergencies, you’re far less likely to experience financial difficulties or have to borrow at a high interest rate if things go wrong or your circumstances change.
Knowing you’ve got some money tucked away could help you sleep better at night too.
How much do you need?
How much you need depends on several things, such as your circumstances, how much insurance protection you already have and can vary from person to person.
For example, someone with a family, a mortgage and loans is likely to need a larger emergency fund than a single person with no children who has no debts.
This is because they have more financial responsibilities and people who depend on them financially.
That's not to say that if you're single you don't need an emergency fund. Everyone should keep some spare money available - it's just understanding how much.
If you have insurance to cover certain losses or expenses, this might affect how much you need in your emergency fund. In certain cases you might only need enough in your emergency fund to tide you over until these insurance payments kick in.
As a minimum, everyone should aim to have enough money to tide them over for 3 months. Even better than that, 6 months.
So, if your monthly expenses are £3,000 you might want a minimum emergency fund of £9,000. This may seem like a daunting amount to aim for, especially when day-to-day costs are high, but don’t be put off. Try setting a goal to save a set amount by the end of year.
Top tips to help you save
Make it simple: Set up a monthly transfer so that money is automatically taken from your current account and put into a savings account.
Time it right: Set the transfer so it goes out of your bank account straight after you get paid or get your pension or benefits.
Keep your savings separate: By keeping your savings in a separate account from your everyday spending you’ll be less tempted to spend them.
Check your spending: If you don’t think you can afford to save, try closely monitoring your spending for a month or two. You may find areas you can cut back on.
Save first: If you get a pay rise, think about saving some of it before you get used to having the extra cash.
Where to keep your rainy day money
Regardless of how many emergency funds you choose to have, the money should always be easily accessible such as in an easy access savings account or cash ISA.
Avoid accounts where you have to give a long period of notice to take your money out.
What about if you’re in debt, should you still save?
If you have debts, it may not be a good idea to start an emergency savings account. It depends on what kind of debts you have.
If your debts are manageable and low cost, this shouldn’t hold you back from starting a rainy day fund.
Having some savings set aside will mean you won’t have to fall back on expensive borrowing if you do have an unexpected expense.
If you’ve got expensive debts such as credit card or overdraft debt, you might want to think about using any spare money you have to pay off these first.