How much of an emergency fund should I have?

When life throws the unexpected at you, you don’t want to be forced to sell investments or borrow money just to get by. If you learn how to build an emergency fund now, set a savings goal and start saving regularly, future you will thank you. Many people believe an emergency fund is a good idea not just for your financial health, but for your mental health too.

What is an emergency fund?

An emergency fund is cash you keep specifically for unforeseen events. Things like losing your job and facing a sudden loss of income, urgent home repairs if the boiler goes, or an unexpected bill that lands on your doorstep at what feels like just the wrong time. Having cash on hand can be invaluable, giving you peace of mind and space to deal with issues.

Because emergencies arrive without warning, the money set aside in an emergency fund needs to be easy to access. It’s not there for taking risks, so it shouldn’t be invested.

What expenses should an emergency fund cover?

Your emergency fund should cover essential expenses that you’d still need to pay even if your income stopped. These usually include basic transport, food, utility bills, rent or a mortgage.

A common pitfall is feeling overwhelmed by the amount of money needed to save if your income stopped. But this usually stems from overestimating the savings goal. Your spending on coffees, eating out and subscriptions can feel important, but they can often be cut back or paused during a tough patch. Ultimately, they are luxuries. When you only budget for essential monthly outgoings, you can avoid feeling overwhelmed and your rainy-day target can feel much more achievable.

How big should my emergency fund be? 

We recommend holding around three to six months’ worth of living expenses. Ideally, you should save enough to be supported if more than one thing went wrong at the same time. And in a worst-case scenario of losing all your income suddenly, your emergency savings should reflect recovery time i.e. how long it would take to find a new income.

How long it takes to get back on your feet may depend on whether you’re employed or self-employed, your industry, and of course, what your monthly outgoings have grown to. 

What’s the best account for an emergency fund?

An emergency fund only works if you can access the money when you need it.

A savings account is usually the most practical option. It keeps cash separate from day-to-day spending, while usually allowing instant access. These are called ‘easy access’ accounts.

It’s worth shopping around for a competitive rate of interest, but don’t lose sight of the main objective here – to retain quick and easy access, anytime, anywhere. Don’t be tempted by accounts with notice periods or penalties for withdrawals just because they have a good headline rate. The rate isn’t worth much if the money is locked away when you need it.

Charles Stanley offers competitive cash savings accounts with benefits suited to emergency savings – accessible, simple, flexible and secure. 

Should couples and families share one emergency fund?

Usually, yes. But this can depend on how you normally manage your money together. Many couples use a joint account for shared expenses (things like rent, bills and childcare) that are essential. In such cases, it can make sense to hold a shared emergency fund as well. 

Whether or not couples and families have shared emergency funds, some people also choose to keep a personal emergency fund. This can provide an extra layer of security, especially if incomes differ significantly between partners and if something were to happen to the relationship. When thinking about a personal fund, consider how your finances would change if you had to pay all the bills, relying on your own income alone.

If you’re interested in building more financial security, we’ve got you covered. Take control of your finances by checking out our other insights on this topic: How to build financial security during a cost-of-living squeeze.