According to Money & Pensions Service, a quarter of UK adults have less than £100 in savings, meaning that they have little or no money set aside for emergencies. Here, we explain what an emergency fund is, why it matters and how to create one. So, if you’re asking yourself ‘Do I need an emergency fund?’, read on.

What is an emergency fund?

An emergency fund is a sum of money saved for unexpected events and expenses, such as the boiler breaking down. It can act as a financial safety net if, for example, you’re made redundant, can no longer work due to illness or caring for a loved one, or if your personal circumstances drastically change. In short, it’s money you put aside for emergencies.

What are the benefits of an emergency fund?

The big benefit of an emergency fund is that it gives you options in a crisis or time of stress. Hopefully, it enables you to remain independent.

You can fall back on money in an emergency fund to:

  • Pay the mortgage or rent if you lose your job
  • Fix your car if it suddenly needs major work
  • Fix something urgent at home, such as the roof
  • Pay for something upfront before your insurance reimburses you, such as urgent dental surgery or an emergency operation in a hospital outside the UK
  • Gain options and independence if you find yourself in an abusive relationship. The charity Surviving Economic Abuse can provide more guidance and support.

Those who build up an emergency fund may also benefit from an improved sense of financial wellbeing. Knowing that you have money that’s set aside for when you need it most can help you to feel calm and safe.

How much should I save for an emergency fund?

The general rule of thumb is to save at least three months’ worth of essential living expenses as an emergency fund. This would mean that you could afford to cover your rent or mortgage, household bills and food for three months, if you lost your job and needed time to find another role.

For example, if your essential monthly expenses come to £1,000, your aim would be to build up an emergency fund of £3,000. This may sound like a lot to put aside, but the idea is to build this up gradually.

Where should I keep my emergency fund?

When deciding where to keep your emergency fund, the most important thing is that it’s instantly accessible. Some people choose to keep their emergency fund separate from their main bank account by opening a second personal bank account or easy access savings account.

If you bank with Starling, you can keep an emergency fund separate from your main balance with the Spaces feature. Spaces is the section of the Starling app that enables you to set aside money for a specific purpose, such as an emergency fund, bills or shopping. You’ll earn interest of 3.25% AER / 3.19% Gross (variable) on balances up to £5,000 in a personal and joint current account, which includes the money in your Spaces as well as your main balance.* These rates do not apply to the 1-Year Fixed Saver which is a savings product with its own rate.

How can I build up a big enough emergency fund?

The idea of building up three months’ worth of living expenses can feel like a bit of a mountain to climb, which is why it’s important to take it one step at a time.

Creating a budget is often the first step to planning your finances and working out what you can afford to set aside for your emergency fund each month. Our Budget Planner is a free tool that you can use to get started - it’s available online and can be used by anyone, not just Starling customers.

If you’re a Starling customer and use Spaces for your emergency fund, you could set up a weekly or monthly top up, which you can include in your budget. You could also switch on the Round Ups feature. This means that when you spend from your Starling account, your purchase will be rounded up and the ‘spare change’ will be added to your emergency fund. Every penny counts.

* Interest is calculated daily and paid monthly. AER stands for Annual Equivalent Rate and shows what the interest rate would be if interest were paid and compounded once each year. Gross is the contractual rate of interest payable before the deduction of income tax at the rate specified by law. Rates correct as of 6 November 2023.

Article updated: 6 November 2023

Subscribeto blog updatesarrow-right

Related stories

Latest posts