How To Build An Emergency Fund

An emergency fund is money you set aside to cover unexpected financial shocks like:

‍

1. A job loss
2. Large, unexpected medical bills
3. Major home and car repairs
   

‍

An emergency fund is not for planned purchases like buying a new house, car, gadget or university tuition.

‍

It is best kept in a high-yield easy access savings account.

‍

In a time of crisis, you are hardly thinking straight. It becomes easy to make poor financial decisions like taking out payday loans, selling your investments or pawning your prized possessions. Think of an emergency fund as a shock absorber that prevents you from making poor financial decisions in a time of crisis. Instead of borrowing more money or selling that investment, you can rely on your emergency fund to keep you going for a few months.

‍

To give you some context, think about the 2020 Coronavirus pandemic. Many lost their jobs, and for some people, having an emergency fund prevented them from making poor financial decisions.

‍

At Koody, we recommend having at least three months’ worth of living expenses in an emergency fund. For example, if your monthly outgoings including rent or mortgage payments, utility bills and other expenses add up to £2,000, you should aim to have at least £6,000 set aside in an emergency fund.

‍

The actual amount you choose to set aside will depend on your personal circumstance. 

‍

How do I build an emergency fund?

1. Start with a small goal - your emergency fund shouldn’t be a large, unattainable amount. To begin, you could aim for three months’ worth of living expenses.
2. Clearly define what an emergency is to you, so you are not tempted to spend the money on something else. For example, is it a job loss? An unexpected medical bill?
3. Set a realistic timeframe - don’t expect to save £6,000 in two months if you only earn £2,000 a month.
4. Open a separate account or savings pot - this way, your emergency fund is separate from all other accounts.
5. Automate your savings - set up a standing order to move money to your emergency fund account regularly.

‍

‍Here’s an example:

If your goal is to save £6,000 within the next year, start by asking yourself how much you can afford to set aside each month. If you enjoy playing with numbers, have a quick look at your bank statement to calculate how much spare cash you have leftover every month. This will give you a realistic idea of how much money you can afford to set aside. 

‍

If you feel the spare cash you have leftover each month is too small, try to push yourself a little and increase the amount.

‍

You can also add extra money to your emergency fund at any time. This will help you reach your goal faster.

‍

How long would it take to build an emergency fund?

Depending on your personal circumstance, it could take a few months or several years.

‍

Assuming your goal is to have £6,000 in an emergency fund, if you save:

• £100 every month, it will take you 60 months or five years
• £200 every month, it will take you 30 months or two and a half years
• £500 every month, it will take you 12 months or one year

‍

Use the emergency fund calculator below to calculate how long it would take you to build an emergency fund.

‍

‍

We recommend keeping your emergency fund in a high-yield easy-access savings account or ISA. This way, you have instant access to your money whenever you need it, and you also earn some interest. Click here to discover some of the best money saving apps in the UK.

‍