Everyone needs to prepare for sudden expenses – for example, a broken washing machine or boiler – but there’s such a thing as too much emergency cash. It’s best to split your savings, keep some to hand for emergencies and put the rest where it can work harder for you.
How to build up your fund
You want to get your emergency fund set up as soon as possible, but like with all savings, it’s best to keep to what you can afford and make sure to save regularly.
Just like you would save for a wedding or a new car, work out how much you need to put aside, and set up a savings standing order for the right amount.
Once you’ve met your target amount for the emergency fund, you might want to continue with the regular savings amount to fund other savings goals – you might well be used to this level of outgoings by then.
How much should I save?
You want to be able to pay for an unexpected repair, but it’s also important to have enough money for a few months in a sticky situation.
Say you lost your job or split up with your partner, and needed some time to get back on your feet – you’ll want a bit more than the cost of a new boiler or washing machine.
If money’s short, start small. For example, saving just £3 a day adds up to £1,095 over a year.
A good rule of thumb is to have three months’ essential outgoings available in an instant access savings account.
So, if you spend £1,000 a month on mortgage or rent, food, heating bills and other things you can’t live without, you should aim for £3,000 in emergency savings.
How much is too much?
Do you have more than six months’ essential outgoings sitting around in your current account or instant access savings?
You might be missing the chance to earn more interest.
And to prevent interest costs mounting up, it makes sense, where possible, to use spare cash to pay off debts before building your emergency fund.
Think about moving some of the excess into a savings or investment home that will work harder for you.
For more information on your savings options, follow the links below:
This article is provided by the Money Advice Service.