From a burst pipe to a broken boiler, time spent unemployed, or even a baby on the way – life can be unpredictable.
This is where emergency funds come in. This savings pot may allow people to cover any unexpected costs without exceeding their monthly budget.
When we surveyed 4,000 UK consumers, building an emergency fund emerged as their top financial goal. A third (33%) of respondents said this was one of their main financial goals for the future, compared to under a quarter who cited their top goal as planning for a comfortable retirement (23%).
To understand this decline, we can look towards the latest insights from the Office of National Statistics (ONS). In 2022, median disposable income fell by 0.6% year-on-year. Meanwhile, in the 12 months to March 2023, electricity prices in the UK rose by 66.7%, gas prices rose by 129.4%, and UK private rental prices increased by 4.9%.
Office of National Statistics (ONS) data showing % increase in prices between March 2022 to March 2023.
Clearly, household incomes have been under significant pressure, but we should still try to top up our emergency funds whenever we can. These pots of money are crucial to help us prepare for the unexpected, and they can also help to alleviate any worries about money during stressful times. So, even if we’re not in a position to prioritise these funds right now, it’s important they don’t totally fall off our radar.
It’s widely accepted that three months’ worth of living expenses is a good place to start. However, as we’ve already discussed, living costs have notably increased over the past year and, as a result, people may decide they want an even healthier savings pot to cover expenses.
Others may feel that having more than three months’ worth of savings is out of reach – particularly in the context of rising living costs. But building up a smaller savings pot (when possible) is always going to serve you better than having nothing.
Once you’ve set your target it’s time to choose a savings method. There’s no right or wrong here: the main consideration is creating a plan you can realistically stick to.
The 1p savings challenge could be a great way to top up an emergency fund. On day one you save 1p, then day two you save 2p, day three you save 3p… then keep going on that trajectory and in a year from now you will have over £650 in savings. Depending on your disposable income, you could try putting away a little more day by day.
There may also be certain costs that you can cut back on and re-direct to your emergency fund. Whether it’s an un-used gym membership or entertainment subscription, recognise and reduce these costs and put the same amount into your emergency fund. When you really need the cash, you’ll enjoy knowing you built up these savings from being savvy with your finances.
You can find more tips on how to stick to your budget and maximise your savings here.
Once you’ve put all the hard work into saving up and reaching your target, it’s important that emergency funds are readily available when you need them most.
So, keep in mind that these savings should be quick and easy to access. Make sure they are kept in an easy access account and check for withdrawal restrictions to avoid any issues when you’re going through a time of stress or are under time pressure.
You can find more information on our easy access savings accounts here.
This research was conducted by Opinium with 4,000 UK adults between 10.10.22 and 17.10.22. Research is weighted to a nationally representative criteria.
*This article has been prepared with care; however, it is only intended to highlight issues and it is not intended to be comprehensive.