An emergency fund: Why you need it and how to build one

With the rising cost of living squeezing our incomes, financial shocks are the last thing we need. 

We're feeling the pain of large unexpected expenses even more acutely, whether paying for a major car repair, a new washing machine or for our child to go on a once-in-a-lifetime school trip.

The worst-case scenario is having to pay for everyday and unexpected expenses if we suddenly lose our jobs with no income to tide us over while we hunt for new employment.

These are all reasons why having an emergency fund is so important. According to the FCA, 3 i n 10 (30%) UK adults have no savings or less than £1,000¹. Another 18% have less than £5,000.

It's not all doom and gloom, however, as more than one in three adults (36%) with no savings are confident they could start to save regularly².

What are the benefits of an emergency fund?

View your emergency reserve as an insurance policy with additional benefits:

• It reduces stress. Knowing you can cover unexpected expenses will help you sleep better at night.
• It can prevent you from making bad financial decisions, whether that's racking up high-interest credit card debt or making extortionate loan repayments.
• It can maintain family harmony. Approaching family members for help when they might be struggling financially too can cause tension and added stress!

How to build an emergency fund

Aim to set aside at least three months' net salary or three months' worth of outgoings. More if possible. This may seem like a big hill to climb, but start small. Look at your household budget, re-evaluate it and identify what you could realistically put away regularly. And be disciplined. If you need to use your fund, focus on keeping it replenished.

Where to keep an emergency fund

Ensure it's out of your current account and in a savings account – make it a dedicated emergency fund savings account. Try to balance it being easy and quick to access when you need it but not so accessible that you're tempted to use it in circumstances that fall short of an emergency! 

While the money's 'locked away', make it work hard for you. Find a savings account with a healthy interest rate. Easy access ISAs may be an option, freeing you from paying taxes on any interest.

I can advise you on building an emergency fund, taking the time to understand your personal circumstances. Contact me today for a no-obligation meeting.

St. James's Place does not offer Cash ISAs.

¹Financial Conduct Authority, published 22 Oct 2022 

²Building Society Association, published 18 Sep 2023 

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