How to Start Saving for Your Emergency Fund

Putting money aside in an emergency fund can help you pay for inevitable, yet unforeseen costs, such as a broken boiler, a damaged car or months of unemployment. Get started with our guide to setting up an emergency fund.

John Ellmore Last updated on 16 November 2020.
How to Start Saving for Your Emergency Fund

Why do I need an emergency fund?

An emergency fund creates a financial buffer enabling you to pay for strike unpredictably. A boiler, car or washing machine could break down, or you could lose your job, and if you don’t have an emergency fund, you could be forced to borrow money to make ends meet.

How much should I save?

How much you save in an emergency fund will obviously depend on your financial circumstances and what you might need the emergency fund for.

For instance, if you have a washing machine you should factor in the chance that it will break down after a certain amount of wear and tear. The same goes for a car, laptop and mobile phone, as well as other pricey pieces of technology such as white goods and TVs.

The Money Advice Service has a useful guide to help you work out how much you might need to save based on what you own. It breaks down how much each item would cost to repair and the percentage of people who incurred that cost in the previous 12 months.

As a rough guide, it can be a good idea to create an emergency fund that is equivalent to three to six months’ earnings. In addition to breakages, this level of buffer will be useful to cover a period of unemployment in between jobs.

By having this fund to turn to if you become unemployed, you’ll be able to cover living costs for a number of months while looking to arrange a new job.

When saving for an emergency fund it’s better to start sooner, rather than later, unless you have other, more pressing, financial responsibilities like high-interest debts, which could spiral if you don’t address them first.

Should I differentiate between an emergency fund and savings?

Yes, opening two separate savings accounts for emergencies and general saving is helpful, as it means you won’t be tempted to dip into your savings in emergencies.

The emergency fund should be easily accessible, just in case you are hit with any major or unexpected costs, while your savings are there for more long-term goals such as a house deposit or simply future financial security.

Splitting these two accounts will help you to avoid spending your savings to cover certain expenses, but still ensure you have a fund in reserve to use in emergencies.

If you are starting an emergency fund before you begin to start a general savings account, it's worthwhile opening a new account dedicated to monthly savings when you think you have a reasonable emergency fund built up. You can always continue topping up your emergency fund every month when you pay into your savings account.

If you think you may be tempted to spend your emergency fund by accident, a good tip is to set up standing orders with your bank so the money automatically goes out at the start of the month. This way you get used to the amount of money you have to spend each month.

Consider paying off your debts first

Paying off your debts puts you on a good footing to start saving for an emergency fund, and saves you money in the long term by preventing your debts from swelling with accrued interest.

Especially if you have high-interest debts on your credit card or overdraft for example, or are behind on any loan or mortgage repayments, it will be better to focus on using any extra cash to clear these before saving into an emergency fund.

Depending on how large and how manageable your debts are, you could choose to pay them off entirely before committing yourself to saving, or you could do both concurrently; just make sure you keep an eye on how your debts might grow.

Read our guide on talking about debt for more information.

5 tips on how to save for an emergency fund

1. Open a savings account

When you’re saving money you want your money to work for you. With a savings account you can watch as your savings pot expands through the months and years, and your financial buffer solidifies to guard you against future financial shocks.

Look for a savings account with easy access to your funds, so you’re able to access them quickly and at no cost in an emergency, if you really need to.

You may also want to look out for accounts that offer an incentive switch deal, so this added incentive could be extra money to save into your emergency fund.

2. Work out how much you want to save

Make an account of how you’ll be likely to spend your emergency fund; your car, household repairs, and any tax bills for example. This will help you work out how much you need to save.

Once you know this, decide how quickly you want to save this money. Say, you decide on 12 months, all you need to do is divide the amount you’d like to save by 12, so you can save equal amounts each month. Make sure the amount you plan to save each month is realistic and manageable, as you’re more likely to regularly save this way than if you aim too high.

Paying into your savings regularly is sensible as it will mean you get into the habit of saving money each month.You might even decide to create a standing order as discussed above.

3. Create a budget

Set weekly and monthly budgets to make sure you can manage all your regular expenses: rent/mortgage, travel, socialising, child care, utility bills. Your budget should ensure that you can still afford to save for your emergency fund.

Budgeting carefully may also allow you to reevaluate your spending and spot areas where you can cut costs. For instance, you could save several hundred pounds per year by switching your utility provider, car insurance provider and breakdown cover policy.

Alternatively, you may find you could save money on your supermarket shop, and you could save a fair amount by cutting out luxuries like eating out. All of these savings combined could help you reach your savings goal more quickly than you’d anticipated.

Or perhaps minimalist finance could give you the financial boost you’re looking for.

4. Consider savings accounts that round up change

With some bank accounts you can choose to round up your purchases to the nearest pound and automatically transfer the remaining funds into your savings account, so you don’t even need to think about saving.

Several apps can do this on your behalf too- read our guide to budgeting apps to find out more.

5. Compare savings accounts

Compare current accounts and high interest current accounts to find an account fitting to your financial circumstances. By choosing the right account to start your emergency fund, and by committing to save into it regularly, you can be in a stronger financial position when you are confronted with those unexpected costs.

About the author:

John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more

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