After dealing with daily expenses, it’s easy to neglect the importance of creating a financial safety net. However, ignoring this aspect can lead to significant financial strain. A study by Norton Finance revealed that the average person in the UK spent £1,590 on unexpected bills over the past two years, with 12% spending more than £4,000. These unplanned costs, which can range from home and car repairs to family emergencies, often take over six months to recover from. In some cases, people had to return borrowed money as a result.
The situation becomes even more challenging if someone loses their job. Statutory redundancy pay is only available after two years of employment, and it is capped at just a week-and-a-half’s pay for each full year worked. If someone is fired or leaves due to reasons like illness, they could face an extended period without income, which can be devastating.
Despite these risks, many people are not adequately prepared. According to Starling Bank, 50% of the UK population has less than £250 in savings set aside for emergencies. This amount is barely enough for a rainy day, let alone a major crisis. The question then arises: how much is enough?
While every individual’s situation is unique, Anthony Fuller, a chartered financial planner at Path Financial, typically recommends an emergency fund that covers six months of essential living costs, along with some extra funds for unexpected issues like a broken boiler. He advises, “You might want to allow more than this in some situations, such as if your income is variable, your employment is insecure, or if you have dependents relying on you.”
Christie Cook, managing director of retail at Hodge Bank, supports this view, suggesting a range of three to six months of typical bills and mortgage or rent. She adds, “For some people, particularly those who are self-employed or freelance, aiming for the higher end of that scale can help provide extra peace of mind.”
This may seem overwhelming, especially if you feel like you’re just managing as it is. However, Christie emphasizes that “the goal isn’t to create a huge pot overnight.” Instead, she suggests setting up a standing order to your savings account so that something is automatically saved each month, even if it’s just a few pounds. This method, combined with the “pay yourself first” approach, where you set aside what you want to save on payday before spending elsewhere, can help prioritize your emergency fund by making it one of your “must pay” bills.
It’s important to remember that even small amounts can make a difference. As Anthony points out, “Even £10-20 per week could equate to £500-£1,000 after a year, which is starting to provide some buffer against financial shocks.”
He also recommends reviewing your bank statements to identify areas where you can cut back. Many people pay for subscriptions they don’t use, and others might be paying too much for utilities like broadband when cheaper alternatives are available.
The best savings account for an emergency fund
When it comes to where to keep your emergency fund, both experts agree that it should be easily accessible so you can withdraw funds whenever needed. Anthony highlights that it should be kept in cash rather than invested, as “you want the value to be stable.” He suggests options like an instant access cash ISA, triple access savings account, or premium bonds.
“Choosing a cash product that generates some interest or return is also beneficial,” he says. “For example, 3% interest on a £10,000 emergency fund would earn £300 per annum, which is well worth having!”
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