Emergency funds and savings

How much money do you have in savings right now? According to Finder  ^{Footnote [1]},  16% of us (8.7 million people) have no savings at all and 25% have £200 or less. 

Putting money aside for emergencies is often difficult, especially as the cost of living is increasing ^{Footnote [2]}  . But if you're able to, building an emergency fund is a safety net for a financial crisis like:

• losing your job
• an emergency repair
• any unexpected cost

If you're not sure where to start, read on to find out how much you should save, where to keep your savings and how else you can protect yourself financially.

First, figure out how much money you have left each month. The simplest way to do this is subtract the monthly outgoings from your income. For example:

Cecilia and her wife Denise earn £2,500 a month in total and have joint monthly outgoings of £1,536, leaving them with £964 (£2,500-1,536) in disposable cash.

Once you have this number, decide on a percentage you'd like to save.

Many financial advisers recommend saving around 20% of your annual salary, but that includes long-term savings such as a home deposit and short-term savings like for holidays or a wedding.

If you're saving for the first time, set yourself a small and realistic target, say £300 in six months or £50 a month. Once you achieve this, you can increase your target.

There are two main things you can do to make it easier:

• Open a separate savings account. This way you can see your savings grow and they don't get lumped in with your other finances. 
• Transfer the money as soon as you get paid. You're less likely to spend it if it's out of sight. 

There isn't a one-size-fits-all approach to emergency savings because everyone's expenses, income and priorities are different.

While having a goal can help you stay on track, don't get discouraged if you don't meet it as quickly as you'd like. Saving is a difficult habit to get into and having anything put away is better than nothing.

Below are three levels that may work for you:

Good

Every penny you put in an easy access bank account will make dealing with the unexpected easier. According to research from the Bank of England 62% of renters don't feel they have enough saved to cover emergencies. You could avoid this by aiming to save £500-1000 in an emergency fund. ^{Footnote [3]} 

Better

Having three months' worth of essential outgoings available in an instant access savings account is often recommended by financial advisers.

Calculate your essential expenses by listing your committed outgoings such as the mortgage, council tax and energy bill. Make sure to include expenses that aren't paid out via direct debit like childcare or annual bills you may have such as car insurance. Total the cost and multiply the number by three to get your savings goal.

Best

Once you have three months' savings, you could aim for more for added security. But remember, although it's important to prioritise your emergency savings, don't neglect your other financial matters once you have a secure foundation.

For example, you might like to evaluate how much you're contributing to your pension. Whilst you won't be able to access the money until you're at least 55 (57 from 2028), increasing your monthly payments into a defined contribution pension is one of the most tax-efficient ways of investing your spare change as you'll receive tax relief which is added to your pension pot.

Be aware that the value of your pension can go down as well as up and you may get back less than has been paid in.

It’s important to know when to break into your emergency fund. You shouldn’t use it for luxuries like going on holiday, as you never know if an actual crisis is around the corner. If you can get by without using those savings, don’t touch them. 

When it comes to something like losing your job, make a budget that cuts your spending to a minimum. When you’ve got to that essential spending then you’ll be able to see exactly what you need each month from your fund. In this case, you should also be prepared to dip into it to cover costs that might help you get another job, like clothes for an interview. 

Your emergency fund is also there to help with large bills for essential things like unexpected car repairs. When it comes to other car costs like insurance or servicing, these are bills you should be expecting, so try and budget for them from your normal outgoings. Your fund is also there to make sure you can repair or replace essential appliances like your washing machine or fridge. 

After you’ve taken money out, make it a priority to top it back up again. 

The short answer is yes. Paying off any debt with your savings can save you money in the long-term. This is because the annual interest you pay on any loans or credit cards is usually higher ^{Footnote [4]}  than interest you could earn with a savings account  ^{Footnote [5]}. For example: 

Brian owes £1,000 to a credit card company that charges 20% APR, meaning he pays £200 in interest a year. He also has £1,000 in a savings account earning 1% AER or £10 a year. That means he's down £190 a year overall. By paying off his £1,000 debt with his savings, he could save £200 a year in credit card interest.

In most situations, you're better off prioritising becoming debt-free before starting an emergency fund. The general exceptions to this rule are:

• Interest-free or low-interest debt. If the interest rate on your debt is less than your savings account and you're financially disciplined, you could still build up your savings without repaying the debt. 
• Penalty fees. If you're locked into your debt and paying it off early would result in a large penalty, you should build your savings until the penalty is smaller. 

Ideally, keep your emergency savings in an instant access account separate to your other money. But that doesn't mean you can't reap the benefits of interest while it's sitting in the bank.

Keep an eye out for introductory rates for new customers. They usually offer a guaranteed rate for a specific period but take note of the end date and be prepared to switch if the rate is poor afterwards. 

If you're looking for an easy access account with competitive rates for your cash, Aviva Save has a range of accounts in one place - and you can withdraw your savings in 2 days.