Having an emergency fund can give you freedom, peace of mind and choices. By saving for an emergency before you reach a crisis, you can protect yourself from unexpected expenses and avoid stress and uncertainty.
If you’re wondering how to start saving for emergencies on a tight budget, modest income, or with minimal willpower, here’s what you need to know.
There’s no such thing as a one-size-fits-all emergency fund.
Some people set themselves large goals and vow to save £6,000 in 6 months or £10,000 in a year. If you find large goals inspiring and you have enough money coming in to achieve these targets and cover essential expenses, this could work for you.
If you’re on a tight budget or big figures make you feel overwhelmed, start small and gradually grow your savings over time.
It can be helpful to break your goal into chunks and come up with possible scenarios the money can be used for. For example:
£500 - Pay for an unexpected household repair
£1,000 - Replace your washing machine when it can’t be fixed
£2,000 - Buy a second hand car and cover some related expenses
£5,000 - Protect yourself from a short period in between jobs
Your emergency savings need to be easy to access, so keep this money in cash.
It’s up to you whether you use a banking app to monitor your progress or keep the money in a traditional high street bank without a fancy app.
Consider how likely you are to dip into your emergency fund for impulse purchases. If you think there’s a chance you might be tempted, place a couple of obstacles in your way. For example, whenever you go shopping, you could leave the debit card you plan to use for your emergency fund at home.
If it’s possible to easily block and unblock your card from your phone, this could be another strategy.
Whatever you do, do not invest your emergency fund. Although investing can be a smart way to build long term wealth, it’s too risky in the short term and you could lose your savings.
Interest rates have been low for quite some time now and you’re unlikely to find a bank account that offers a generous interest rate. Don’t put too much thought into this. Your emergency fund doesn’t have to earn interest. All that matters is that it exists and is ready for you when you need it.
Before putting money in your emergency fund, make sure any priority debts are taken care of. Your priority debts are any debts that can have serious consequences if you don’t do anything about them. They can include:
Council tax arrears
Gas or electricity bills
Phone or internet bills
TV licence payments
Overpaid tax credits
Payments for goods bought on hire purchase
Unpaid income tax, National Insurance, or VAT
Unpaid child maintenance
It’s also wise to pay any high interest debts before saving. Otherwise, your debt repayments will undo the progress you make with your savings.
The hardest part is getting started but once you know how to start saving for emergencies, you can make changes to your budget and watch your bank balance grow.
Many people wait until the end of the month before putting money in their savings account, but this approach isn’t always effective. You may get to the end of the month and only have £10 left to save. Even worse, you could be left with nothing.
Instead of saving what’s left after spending, spend what’s left after saving. As soon as you get paid, move a set amount into your emergency fund. Hopefully, you won’t even notice that money has gone.
One of the most effective ways to save an emergency fund is to automate your savings so you don’t have to think about it.
By setting up a standing order from your current account to your savings account, you can make regular contributions without having to put much effort in.
Your emergency fund will keep growing in the background.
If you want to save an emergency fund quickly, it can be tempting to throw hundreds of pounds into your savings account in one go.
However, this approach can be counterproductive because if you end up dipping into your savings for a non-emergency or regular expense you forgot to budget for, you may feel as though you’ve failed.
This could be demotivating and could trigger you to make more impulse purchases.
Try to save a manageable and sustainable amount each month. Slow and steady wins the race, after all.
Trick yourself into saving money by taking part in a money saving challenge. Here are a few possibilities:
The 52-week challenge
This challenge is ideal if you want to make steady and gradual progress. Here’s how it works:
Week 1 = Save £1
Week 2 = Save £2
Week 3 = Save £3
If you increase the amount you save by £1 each week, you’ll save £52 in the final week of the year and have a respectable £1,378 by the end of the challenge.
The 1p a day challenge
The 1p a day challenge operates in a similar way to the 52-week challenge. All you have to do is commit to saving an extra penny each day. This can be a smart way to make the most of your spare change.
Day 1: Save 1p
Day 2: Save 2p
Day 3: Save 3p
By the end of this challenge you’ll have £667.95.
The £5 savings challenge
Do you often pay in cash rather than by card? This challenge could be right up your street. Every time you receive a £5 note, put this money in a piggy bank.
This approach might not be an effective way of saving an emergency fund on its own, because there’s no guarantee you’ll receive enough fivers. But, when used alongside other saving strategies, it can be a fun way to boost your emergency fund.
If you’re ever struggling with a lack of motivation, remember why you’re saving for an emergency.
An emergency fund might not be as fun as a holiday, car or wedding, but it can be beneficial for your emotional wellbeing as well as your finances.
Your emergency fund can give you freedom and choices that you might not have when your bank account is running low. When you have money set aside for a rainy day, you can get your boiler or car fixed without having to borrow money or pay interest.
If you keep saving, your emergency fund may get to a stage where you’d feel comfortable quitting a job you didn’t like without another one to go to. This can be an extremely risky decision, but having savings can protect you while you’re out of work.
You may have to dip into your emergency fund from time to time. Instead of seeing this as a set back, be proud of yourself for saving that money in the first place.
Your emergency fund is designed for emergencies and it’s better to use your savings than get into debt for unexpected expenses.
Of course, if you’re dipping into your emergency fund for a new outfit or a takeaway, this probably isn’t the best idea. But we all make mistakes and there’s no point beating yourself up. Instead, learn from it and move on. Saving an emergency fund is difficult and you’ve still made great progress.