An emergency fund is all about not having to borrow money when the unexpected happens. If you have a house or car then the obvious example is either could break down, a boiler could “go” (where it goes nobody knows but this term has been used by father in law’s for centuries) so having money set aside to pay for these expenses when they come round (because they will) is a good idea.
How much should the fund be?
An emergency fund should be enough to pay all your most important bills for several months. Three to six months of your usual wages or income is a good amount to aim for, although anything you can put away will help.
It’s your call as to the exact amount you may need as this is dependent on your circumstances, you may need more if your partner or children rely on your income and your job is not secure for example.
How to save
Quickly is the easiest answer here. Max out your savings each month to build up the fund as quickly as you can, you then have the bedrock of your financial journey started and you can do one of two things. Either continue the savings habit to save for a house deposit or ISA (check out our content on this area for ideas) or return to your spending habits and start planning the next holiday…..either way, you have made a good start by having an emergency fund in place.
Keep it in a separate account so you don’t spend it obviously! An instant-access savings account lets you withdraw some or all of your money whenever you need it without fees or interest penalties although the rates are usually low.
A word on debts instead of saving
The interest you pay on your loan, credit card or mortgage is likely to be much higher than the interest you can get on a savings account.
Paying off debt is always the first priority, and these should be repaid as soon as possible or at least at the same time as starting to build an emergency fund.