What is an emergency fund?
05 November 2019
In a 2015 study, The Money Advice Service suggested four in ten adults in the UK do not have more than £500 in savings. At one time or another we have all had an unexpected expense come out of the blue. A boiler repair, a vet's bill, or maybe a car breakdown. If you've no savings to fall back on it can leave you feeling very stretched or maybe even put you into financial difficulty.
What is an emergency fund?
An emergency fund, also called ‘emergency savings’, refers to money that is set aside and only used in case of unplanned events. These unplanned events could be anything from needing a new washing machine to sudden unemployment.
How much money should I have in an emergency fund?
According to The Money Advice Service you should have at least 3 to 6 months of expenses available to you at any one time. This means that if you ever have unexpected costs such as vet bills or your car fails its MOT, you will always have some money to hand.
It is also helps if you keep your savings separate from your emergency fund. This will help to make sure you’re not tempted to spend your emergency fund on the things you’re saving for, like your next holiday.
We have an interactive budget planner calculator that can help show how much you could save each month.
What are the benefits of an emergency fund?
The main advantage of an emergency fund is being able to access money as and when you need it. It is estimated that the UK has one of the lowest rates of savings in Europe. We want to encourage our customers to get into the savings habit by putting away a little bit every month if they can afford to, helping them to be prepared for whatever surprise expense may come their way.
How do I save for an emergency fund? - Little changes can boost savings
Cut back on your morning coffee
As an example, if the average cost of a coffee is £2.75 if you were to buy one every Monday to Friday this is £13.75 a week and over a month this amounts to £55. This is just one example of a quick fix that can really help you build up your emergency fund.
Use family subscriptions
Streaming services such as Amazon Prime and Netflix allow you to share the benefits of their deals with family members for less than paying for multiple subscriptions. It's always a good idea to review direct debit payments and get rid of any unused subscriptions.
Common unexpected bills and their average cost
Another benefit of having an emergency fund is the fact you can be prepared for any large unexpected costs you may face in day-to-day life.
We have listed 3 common and often unexpected bills:
Car repairs and breakdowns
According to This is Money, it is estimated that the average cost of a UK car repair per year is £1,678, which has risen from previous years by over a third according to a 2018 study.
Average vet bills
Pet insurance is not compulsory in the UK, which means that many people don’t have pet insurance for their furry friend. A study from Money Supermarket found that the average cost in the UK for a vet consultation with an overnight stay can be over £560.
When it comes to your home, there are many things that could go wrong, as household insurance may not cover certain items.
The top unexpected home repairs according to a recent survey are:
- Window replacement (average cost £5,500)
- New kitchen (average cost £8,000)
- Boiler repairs (between £500 and £2,500 depending on the fault)
There are also unexpected bills such as medical expenses such as emergency dental treatment for treatments such as emergency root canal.
Where should I save my emergency fund?
There are many options when it comes to where to save your emergency fund. Keep in mind that it is important that you can access the money whenever you need to. For this reason, locking your money away in a fixed term savings account may not be the right account for this type of savings. Look for savings accounts that allow instant access and limited instant access, so that you can deposit and withdraw money as soon as you need to.