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Emergency funds: The ten essential steps

How to set up your emergency fund

Creating an emergency fund is a lot like making love to a beautiful woman.

  • First, you have to be realistic about the size and shape of what you can put away.
  • Then you have to go at it diligently and regularly until you’re satisfied.
  • Finally, you must vow never to touch it again unless you have to.

Dubious humour aside (I was channeling Swiss Toni, feminism fans!), I’m such a teacher’s pet that I built up my emergency fund as soon as I got a job.

I’ve already explained why I think you need an emergency fund, too.

So now let’s run through the ten essential steps to ensuring your emergency fund is ready for nearly anything life throws at you.

Remember, as well as an emergency fund you need to be appropriately insured for the really big emergencies (your house burning down, say).

And to repeat myself, never think you’ll rely on debt in a crisis — that’s like pissing in a lifeboat!

1. Save up at least three to six months income

I’d aim for six months, but admittedly there’s no limit to how much cash you could save for a rainy day. One month is better than nothing — six months should get you through most scrapes, unless your bad luck comes in threes.

If money is very tight, save three months expenses (as opposed to income) at an absolute minimum.

2. Keep your savings in instant access cash

Don’t be tempted to think of your emergency fund as part of your investment portfolio, as before you know it you’ll be chasing better returns. That in turn could lead you to lock away your cash in a longer-term savings account, to risk a loss in bonds, or even encourage you to put it into the stock market.

Don’t go down this road — cash you can get hold of within a maximum of 72 hours is the aim.

3. Get a decent interest rate

Provided your cash is quickly accessible, there’s no reason for it not to earn decent interest. Here in the UK you can get 3% from an instant access account.

With six months income put aside, you’ll be bleeding away a lot of money if your cash is languishing in a poor account. At the very least your fund should grow with inflation.

4. Keep it separate from other savings

Ideally, your emergency fund should be in a different account to any money you’re saving for a car, a holiday or a pet parrot.

If you’re very disciplined you could keep it all together and vow that the first £10,000 (say) is untouchable. If you’re not, put it elsewhere.

5. Know an emergency when you see one

Spotting a new fridge freezer you must have when out shopping or a bargain holiday is not an emergency.

Some people are unused to having cash savings, so as soon as they save their money they’re tempted to spend it. It’s even harder (as always) if your partner has a different mindset to you.

Decide what is — or what isn’t — an emergency at the outset, and start saving for anything else after you’ve built up your fund.

6. Anticipate what could go wrong

Many of us have hobbies, expensive equipment or other liabilities (also called children) that we know will put pressure on our finances.

Systematically go through all your outgoings, and look for realistic scenarios where they could call on your cash. At the very least, your emergency fund should be big enough to handle such events. Ideally, you’d save the extra money on top of your 3-6 months of income, just in case you’re hit by a double-whammy.

7. Make sure you’re properly insured…

This is a whole other article in itself. In short, make sure your property and your life is adequately insured for you and your family. (Though don’t bother with the latter if you’re single).

It may be appropriate to take out income protection insurance, but tread very carefully. Such policies are notoriously problematic in terms of when and how they pay out.

Don’t mistake cash savings for financial invincibility. Big hits to your property or an accident when abroad can dwarf your emergency fund.

8. …don’t scrimp just because you’re insured, either

I know I’m labouring the point, but you should have an emergency fund as well as insurance, not instead of it.

If you’re arguing with an insurer for six months about whether you qualify for income protection payments, you could go into default on your mortgage in the meantime. With an emergency fund, you’ve got a buffer zone.

9. Review your fund regularly

The money you saved when you first graduated from college won’t be sufficient when you’ve got two kids, a spouse and a house. (And as for a mouse…)

Make sure you review your fund at least annually, since expenses and liabilities creep up at least as fast as salaries rise (and probably faster for anyone with kids or a big house).

Top up as appropriate – and it goes without saying you should repay back any cash you withdraw once the emergency has been dealt with.

10. Always be prepared

That’s what they used to tell us in Scouts. It was easier then, of course, since being prepared meant carrying one of those Swiss Army knives with an attachment for getting stones out of horse’s hooves and packing lots of chocolate.

Doing without while you save up your emergency fund is a lot less fun, but the alternative is much, much worse. Always be prepared!

Have I missed anything? Please let us all know in the comments below.

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{ 14 comments… add one }
  • 1 Lee October 2, 2009, 1:59 pm

    Great advice there, Monevator.

    My emergency fund is all but non-existent at present. Technically I have one if a disaster struck, but it is actually earmarked for paying off my loan in a few months’ time when the balance is finally larger than the outstanding balance.

    Once that is out of the way, I will speed-pay it up to 6 months of expenses, then more slowly to 6 months of income. After that, my savings & investment plan will be much as I’ll discuss on my blog when the time comes 🙂

  • 2 The Investor October 2, 2009, 5:28 pm

    Good luck Lee. Building up an emergency fund is a great way to kick the debt habit, not least because it downsizes your expectations of disposable income.

    If you’ve been saving it, you haven’t been spending it – and so you won’t miss it! 🙂

  • 3 Hank October 3, 2009, 9:52 pm

    Great rundown of tips. I personally struggle with figuring out if an emergency is really an emergency or just a want. I’m quick to dip into my emergency fund unfortunately.

  • 4 Rob Lewis October 7, 2009, 10:55 pm

    Great tips, and my favourite use of a Fast Show character in a personal finance article EVER!

  • 5 Cheapskate Sandy October 21, 2009, 4:25 am

    I love your use of analogies here. Almost made my top 5!

  • 6 John Porcella September 27, 2018, 3:21 pm

    With interest on cash holdings so low, why not simply invest the money? If no emergency occurs immediately, then the returns could be good. Admittedly, if having, say, bought some shares there is an emergency, then buying and selling costs will eat into funds, as might a drop in equity prices.

    I keep one ISA invested which is for big emergencies.

    If the emergency never happens then I am delighted with the dividends and the capital growth.


  • 7 The Investor September 27, 2018, 3:38 pm

    @John — Um, because shares can drop 20% in six months. That’s not an emergency fund, that’s not an investment. 🙂

    Of course, as I say above if you’ve got sufficient assets you may feel that you could still handle emergencies by selling down shares anyway. That’s fair enough (although I’ve noticed the cost of potential emergencies tends to increase with wealth — e.g. emergency repairs to the yacht after a storm!)

  • 8 He who saves September 27, 2018, 4:45 pm

    I’m following a similar approach myself but split the fund between instant access and notice accounts. I struggle to get 2% on even the notice account, let alone the 3% on the instant access as you’re describing. What am I missing? :O

  • 9 The Investor September 27, 2018, 5:14 pm

    @HeWhoSaves — Hi! This article is from 2009 I’m afraid, and hasn’t been updated, as per the byline. 🙂

    You can get 3-4% in the instant-ish (24 hours) access rolling market at RateSetter, if you fancy that:


    Remember that the Rolling Market isn’t guaranteed access. If there’s a big market dislocation or similar, then you might not be able to instantly withdraw the money. I’ve done it several times within 24 hours in these normal times though.

    Also remember peer-to-peer isn’t the same as cash. Read that article for some of the extra risks.

  • 10 He who saves September 27, 2018, 6:04 pm

    That would explain the rate! Apologies for the resurrection, I didn’t notice the date here as the email I followed said it was posted today. Thanks for the suggestions.

  • 11 The Investor September 27, 2018, 11:06 pm

    @HWS — No need for an apology, but thanks. I wasn’t super clear. Should probably update this article too!

  • 12 Jonathan September 28, 2018, 7:04 am

    Keep the emergency fund liquid, AND protect it from inflation?

    When I read that bit, I had to scroll back to the top, to see when this article was originally written! 2009 – those were the days, my friend, we thought they’d never end.

    Now I have to pay one-and-a-half percent a year into my emergency fund to make up for the gap between inflation and the interest my money earned. The cost of holding cash, and insuring against income interruptions, is tangible.

    Keep a fund, but try not to over-insure. Even complicated and tedious strategies like maintaining a ladder of fixed-term deposits maturing incrementally through the year doesn’t yield much of a better rate.

    What’s the solution? I suppose there isn’t one.

  • 13 The Investor September 28, 2018, 8:11 am

    @Jonathan — Yes, in retrospect I should have perhaps removed the link to this article from the updated one, or somehow waited until I had time to update this one, too. It has caused some confusion.

    That said I think (as you suggest) that a real terms cost of 1% or so a year on the relatively small amount of money in your emergency fund is just the price of security right now. It doesn’t change the desirability of having an emergency fund.

    I think it’s best we keep the discussion on that updated thread (partly because as you’ve identified this post is a bit past it in a couple of details), so you’ll find my further thoughts there if interested:


    I’ll try and update this post in the next few weeks to reflect current rates/inflation.

  • 14 dave December 6, 2018, 11:56 pm

    I really enjoy reading your articles. Could you kindly clarify whether you mean three to six months of gross salary or what you receive in the bank each month)
    Thanks! Dave

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