A Good Life Guide: Your Emergency Fund

A good life is whatever it means to you. The goal of this series is to help you define it and most importantly, build secure foundations to make it happen.

Kicking off with the finance fundamentals:

In this guide, we'll cover

✅ What an emergency fund is and why you need one

✅ How to evaluate how much you need

✅ How to pay yourself first

✅ Where to put your emergency fund

✅ What to do about debt and other saving ambitions

A note on using this guide:

🌱 When you see text in a box like this, it's a task

Unexpected Events Are A Part Of Life

If you’ve ever tried to adhere to a spending plan, you’ll know how difficult it can be to accurately predict future costs. Life can be expensive, and emergencies are inevitable.

1 in 4 adults does not currently have an emergency fund.

11.2 million people across the UK have savings of less than £1,000.

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Read this Confession: ‘I have a 10k anti-f***wit fund... here's why’

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What is an emergency fund?

An emergency fund (EF), sometimes referred to as a "rainy day fund" or "freedom fund," is an essential financial safety net. This fund is designed to help you manage unexpected expenses, such as a broken boiler, illness, or an urgent veterinary bill. It provides the financial independence to leave difficult situations, such as a toxic job or relationship. This is your ‘in emergency break glass’ financial SOS tool.

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Old school advice

The old school advice is that you should save 3-6 months’ worth of living expenses. In this case, if you lose your job then you'd have a decent amount of runway to see you through until you find another job.

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But for the average person, that's going to be between £4,500-£10,000. That's an amount that will probably take you months or even a year or more to save.

Let's say you're an average earner on £35,830* before tax, and you spend:

You spend:

🏠 £700 on rent a month

🥕 £750 on groceries, bills, car insurance, maintenance costs etc.

🎉 £200 on holidays, eating out and fun stuff

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After these costs, you can probably afford to save about £300 a month—at a push. To save just a £3000 emergency fund is going to take you around 10 months.

_{*The median salary in October 2024 according to the ONS}

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New school wisdom

So yes, in an ideal world, we’d all have at least 3-6 months’ worth of living expenses saved up. If you're on a high income, go for it.

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But a better question to ask yourself is this:

🌱 If the worst happened, how much would I need to get through it or solve the problem?

Situations you should explore include:

❇️ Redundancy

❇️ Illness

❇️ Home maintenance

❇️ Family emergency

❇️ Relationship breakdown

Think through those situations and then consider the following questions. If you're the pen and paper type, this table format might help.

A single person with no kids will have a very different answer to a family of 5.

To answer the 'how much' question, you'll want to look at your recent expenditure. What's your 'bare-bones' budget? i.e. how much could you live on comfortably enough, if push came to shove.

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Some things to consider...

🔥 Risk profile

It's very important to factor in risk. A civil servant or a doctor will have a different risk profile for redundancy to someone who works in a more vulnerable sector.

🪂 Your parachutes

Also, you'll want to think about any other parachutes you can rely on:

🪂 Your non-financial back-ups - e.g family, a spare room. Could you safely rely on a family member to support you? Could you move in with someone to save on rent? Do you have a room you could let out?

🪂 Protection - Does your employer provide things like health insurance or critical illness cover

🌱 Thinking in terms of numbers and actually writing this down can help. Particularly if you're really worried about redundancy or a particular worst case scenario. With this in mind, you should be able to estimate roughly what you'd need for your Emergency Fund.

🗓️ Regular Reviews

Review your plan for your emergency fund every year to ensure it still meets your needs. If you end up using your emergency fund then it’s back to the previous step to consider what you need to re-save and build back up your reserves. As your expenses and responsibilities grow, you may need to adjust your savings target to keep up.

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🔋 The Power of Small Contributions 🔋

Even small, consistent savings can build up over time. Here’s a look at what saving a little each week could amount to annually:

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Paying Off Debt VS. Building An EF

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Q: Should I pay off debt first?

A: If you’re paying high interest rates on a credit card, it’s essential to prioritise paying off that debt. Delaying repayment could cost you hundreds, if not thousands, in additional interest. As long as you have access to a credit card for emergencies, focus on directing as much of your income towards clearing the debt as you can reasonably afford before starting to build your emergency fund (EF).

Q: What if I feel nervous without one?

A: That said, having some cash available can be reassuring. You might consider spending a month or two building a small emergency fund before fully committing to paying off your debt. If your debt is on a 0% interest plan and the promotional rate isn’t expiring soon, you could focus on building your emergency fund. However, it’s crucial to monitor when that interest-free period ends and plan accordingly to ensure you can pay off the debt in time.

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How do I actually save for one?

The big question is:

🌱 What can I realistically afford to save every month?

If you're currently not able to save anything then it's time for an audit of your outgoings and spending plan. You might also want to look at auto-savers which offer round-up features like MoneyBox, Monzo and Chip.

Pay yourself first

The most important step is getting that EF money out of your current account ASAP. Your employer pays you but it's only when you've set that money aside that you've paid yourself. Think of your current account as money to be spent that 'current' month but you need to move money into your savings to be paying your future self. It's about harnessing the psychological effect of prioritising your future self before anything else.

🌱 Decide on a savings account or pot. Set up a standing order or use an autosave feature on your banking app to make these savings happen without having to think about it

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Where To Put Your Emergency Fund

This part is critical. The goal is not just to save but to make sure your savings are in the right place.

Pay Yourself First 🫵

The most important step is getting that EF money out of your current account ASAP so you don’t spend it. Set up an automatic transfer to move the money the day your paycheck hits.

If managing multiple accounts isn't for you, consider keeping your emergency fund in a savings "pot" or "vault" linked to your existing current account.

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Accessibility 🚫

Avoid locking your emergency fund into accounts that are difficult to access. The goal here is quick, hassle-free access for genuine emergencies. Consider using an online instant-access savings account or even a high-interest current account with quick withdrawals.

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Separate From Other Savings 📦

Maybe it's holidays or a new MacBook, but in addition to your EF savings, you will want to save into another 'pot' or account for the bigger, boujier, but non-essential purchases we all need to make. Keeping it separate from other savings means you can better keep track of your money.

Premium Bonds 💷

With premium bonds, your money is safe and accessible, and you have the chance to win cash prizes instead of earning interest. It’s a fun option, but not guaranteed income like traditional savings. However, the option to withdraw anytime makes it an appealing place to store emergency funds. Note: you can also opt to cash in your current premium bonds at any point but it takes approximately three working days which isn’t as accessible as an easy-access savings account. You might want to keep some of your EF more accessible.

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Recap

To recap, we've covered:

✅ What an emergency fund is and why you need one

✅ How to evaluate how much you need

✅ How to pay yourself first

✅ What to do about debt and other saving ambitions

If you've got questions or need support

Connect with others for honest advice on work and money, and get career guidance from people who’ve been where you are. From payrises to prenups.

Real stories, real support.

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