Much as we love investing here at Monevator, even we believe saving for an emergency fund comes first. Building a cash stash to bubble wrap you against life’s bad breaks is probably the most important financial move you can make – after clearing bad debt, of course.
Stuff happens, as they say in polite company, and that’s the starting point for why you need an emergency fund.
Why you must have an emergency fund
When you’ve got a job and good health and your income exceeds your outgoings, setting cash aside might not even occur to you. But without savings, you’re walking a tightrope – and the smallest shove can send you into the abyss.
You might not be hit by one of the life-changing shocks that kicks people on to the streets. But there are plenty of smaller things that can go wrong:
- Your income may drop unexpectedly, and no longer cover your essential expenses.
- A member of your family could get ill, and you want to hurry forward treatment.
- Something might blow up – from the archetypal boiler to a car engine.
- The roof could literally fall in.
- A far-flung relative could get married or get cancer. Either way you might want to fly out to be with them.
- Your investment platform could go bust, leaving you in need some other source of cash to live on while the administrators clean up the mess.
A sudden divorce, job loss, illness, or a lurch into debt can push any of us into a downward spiral. But having a good emergency fund on standby helps ensure that you never enter that parallel universe.
At the very least, you’ll feel better just knowing your rainy day savings are there.
How much emergency fund should I have?
Save at least three to six months’ income.
Having this amount on hand is a good starting point. It’s not a magic number but a balance of considerations.
Obviously, there’s no limit on how much you could save for a rainy day. You could argue that a plumper cash cushion is best. Indeed, why not save to cover one year or even two?
By all means tailor your fund to match your circumstances. But be realistic about how quickly you can save your disaster-dodging dollop.
Aim to save too much, and spare cash won’t be going where it might do you more good long-term. (Think paying off a mortgage, or investing in higher growth assets.)
Cut your cloth
It’s better to think about your emergency fund in terms of your monthly after-tax income rather than an arbitrary and set amount of cash.
A £10,000 emergency fund is obviously superior to having £1,000 in emergency savings, but it’s your monthly burn rate that counts. If the bare essentials cost your family £5,000 a month then even a £10,000 emergency fund won’t last long.
So first, think about how much money you’d need to pay the bills for a month if you cut back on all the non-essentials you can live without in a crisis.
A budget planner can really help with this step.
Now imagine you’re out of work for several months because of unemployment during a deep recession, or due to an unfortunate illness.
Six months’ income (after tax) should get you through that kind of scrape unless you’re really unlucky.
In theory, six months’ worth of net income in your emergency fund will last longer than six months on an emergency budget. That’s because your income normally pays for life’s little luxuries, too.
But that extra wiggle room may be a lifesaver if you things go from bad to worse.
Say, for example, your car conks out just before a big job interview. With enough in your emergency fund, you’ll be able to afford an immediate replacement in the nick of time.
If money is very tight, then save three months’ worth of essential expenses (as opposed to net income). That is the bare minimum you should aim to hold in your emergency fund.
Where to keep your emergency fund (UK)
Keep your savings in instant access cash.
Do not be tempted to invest your emergency fund, seeking a better return.
There’s absolutely no point running the risk that your emergency savings are halved in value – just when you need them most – by a stock market slump.
Remember that stock market falls are correlated with recessions.
Covering a period of unemployment is a prime use-case for an emergency fund. That’s more likely to happen when the economy as a whole is in recession – also usually the worst time to be in equities.
So limit your ambitions for your emergency money to earning the best interest rate you can from an instant access account.
The Best Bank Account comparison tables will put you on the right track. Choose from current accounts, instant access savings, and ISA accounts.
Make sure your cash is held in institutions (ideally more than one) covered by the Financial Services Compensation Scheme (FSCS).
Another good tip is to keep your emergency fund separate from other savings.
Ideally, your rainy day savings should be in a different account to any money you’re putting towards 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.
But in practice few of us are saints. So unless you’re expecting to get your halo in the post, put your emergency money elsewhere.
When to use your emergency fund
Spotted a delightful new fridge freezer that you simply must have when out shopping? Come across a bargain holiday?
Those are not emergencies.
Some people are unused to having cash savings. As soon as they’ve saved any money they’re tempted to spend it. It’s even harder if your partner has a different mindset to you.
Decide what is — or what isn’t — an emergency at the outset. Then start saving for anything else after you’ve built up your fund.
We offered some suggestions for valid emergencies near the top of this article.
Review your emergency 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.
Make sure you review your fund at least annually. Expenses, liabilities, and inflation all creep up at least as fast as salaries rise. Top-up as appropriate.
It goes without saying that should pay back any cash you withdraw ASAP, once the emergency has been dealt with.
Think about insurance for some emergencies
Don’t mistake emergency savings for financial invincibility.
Big hits to your property, income, or health can dwarf your emergency fund.
The best protection is a mix of cash buffer zone for smaller mishaps, plus insurance that covers you and your family from catastrophic loss to life, limb, and property.
Check out our useful articles on making the best use of insurance.
Bear in mind that insurance companies can take a while to pay out, or even fail to do so altogether. Another instance in which an emergency fund can be a lifesaver.
Emergency fund UK: don’t use debt!
A lifestyle that habitually requires you to dip in and out of debt is the type most likely to get derailed by a cash call.
If you bought your kitchen on credit, there’s a strong chance that you’ll try to fend off any unexpected outgoings with your credit card or a personal loan.
But what if your particular emergency is a cut in your income? Increasing debt payments in the face of a falling income is about the worst thing you can do. Short of selling a kidney.
Avoid this at all costs, by saving cash in advance and shunning debt. Even if your salary is secure, increasing debt payments will leave you more vulnerable when fate deals you a blow.
Companies go bust due to cashflow struggles. Debt is often the multi-tentacled monster that drags them under. And people are the same.
Get out of debt, then start saving into your emergency fund.
Emergency money gives you confidence
The final reason you should build up your emergency cash reserves is because it will give you the security to (separately!) invest in the stock market – and ultimately enable you to meet unexpected expenses without liquidating your equities when they’re down.
With a sufficiently big emergency fund in place, you’ll find it easier to develop the lofty disdain necessary for long-term investing.
Marie Antoinette offering cake from within her palace walls when the rioters are at the gates should be your role model when investing. Not Corporal Jones in the BBC classic Dad’s Army, panicking at the first hint of trouble.
Cash on hand gives you that security. With an emergency fund saved to cover your unforeseen expenses, you needn’t worry when the market wobbles.
Start with an emergency fund
Need one last nudge to build up an emergency fund? Here you go: it gives you the bug to save and invest much more.
That’s certainly what happened to me.
And I’m confident that if you’re a saving virgin, you too will get a buzz from seeing your net worth steadily going up instead of down.
Before you know it you’ll be wondering how to start investing!
All excellent points that pretty much follow precisely my new philosophy. Some PF bloggers (and a lot of the general population) seem to support using fast credit (e.g. credit cards) as the emergency fund which is all well and good – until the emergency is redundancy. Then what do you do?
Yep, using credit is one of those ying/yang things.
A lot of people use credit cards for everything. I know women who proudly go on plastic-powered shopping sprees as if it’s clever and aspirational to give some faceless corporation a load of extra income on a Saturday morning.
Once you’ve realised (i.e. got furious about!) how you’re throwing money away by paying a credit card or loan company just to buy something early – plus exposing yourself to massive extra risk, as you say – then it’s easy (and almost always a good thing) to go the other way and avoid it like the plague.
I’ve even avoided debt in my small businesses, which has led to disagreements with – you guessed it – the credit junkies on the team! I haven’t paid a single penny in interest on a loan for well over ten years, and only the student loan before that.
The above said, I do use credit cards for their other benefits – such as consumer protection and cashback. My main card is set to direct debit payment so there’s no risk of any interest. Doing this you basically get a 45 day interest free loan from the supplier, and are rewarded for it. 🙂
If there’s any danger at all that you’ll fall back into actually taking on debt with a credit card, however, it’s safer to cut it up and bin it.
Again, everything sounds like an emergency here!
Like I said… if you are thinking in “emergency fund” terms… you are scraping the bottom of the barrel and need to do more!
Where is Lee BTW? He disappeared!
.-= Financial Samurai on: The Emergency Fund Fallacy =-.
Well, we’ll have to differ. As I said elsewhere, in my view an emergency fund is exactly what it is – a cash fund that enables you to cope with unexpected things, entirely separately from your everyday savings aspirations.
You may (did! 😉 ) on your blog that if you’ve got $100,000 in the bank you don’t need an emergency fund, but that’s like saying if you’re Meggan Fox you don’t need to wear makeup. Not relevant for most people, who must effectively lock up most of their long-term savings in assets such as equities on an uncertain time horizon.
If they don’t have cash and emergency strikes, they’ll have to go into debt. If they do have a tonne of cash like you suggest, then they’re going to retire poorer than they need to because of the terrible real returns.
As for Lee, I think he found love. 😉
Hi there. Great site – keep up the good work!
I’ve now built up my emergency cash fund. Now the big question – where do I store it, or shall I allow inflation to eat it up?!
I’ve been trying to buy Barclays Index linked bond but nobody has any information about how I buy it (I even have the ISIN number but cant find it on the market – they only speak to IFAs when I call direct).
Please help!
I’m in agreement on the need for a robust emergency fund … or at the very least, an emergency plan that will get you through six months if you lose your job. It doesn’t have to be cash savings, you could take into account redundancy cheques and other investments.
However I’m very wary of relying on credit cards or overdrafts to tide you through in the event that things go wrong. They are not committed facilities. The banks have sophisticated systems to identify when your financial circumstances change. If regular salary payments disappear, they will pick it up and they will be on the phone to you.
You might find that the credit card limit or overdraft facility that you were relying on to support you through redundancy suddenly disappears!
Some of the emergency fund needs to be in cash, not bank deposits, as the Cypriots recently discovered.
I don’t think you should dismiss credit cards so quickly. Perhaps if you are a regular user of debt, and load and unload cards frequently, you might get sucked into a debt spiral. But if you never even take out car loans, and pay cc’s in full by direct debit, then its better to have the £10k to go on them, to be cleared from savings, than to have £10k doing nothing.
Flexible ISAs are also better than current accounts, provided you can return the money with the tax year.
And any hit you might have from a forced sale of equity that might take a month to organize is still better than the drip-drip of loses of the 3 years salary in cash some believe in.
At first, I struggled with emergency funds. How could you be so unprepared that you need to use savings? After all, isn’t that the point of insurance? To cover the unexpected.
I now see the benefits. An important one is that it is a good way to start saving. A second one is that it teaches discipline: there is cash in your account and don’t spend it.
On credit cards, I think it is fine to use those as long as you have the cash already available to repay the credit card.
Could use an offset mortgage…
I think, in favour of emergency funds, that if it means you can self insure to some extent, then you can consider the premiums you save to be a hidden extra return on cash, especially if the same pot can cover multiple improbable emergencies, this hidden return/savings beats equities
I count my mortgage overpayments as PART of my emergency fund. Currently have a reserve of 9 months. It’s reducing my interest owed but if needs be I can stop paying my monthly mortgage for that time.
Before I set up my emergency fund a few years ago, I swore by my 0% credit cards.
But having spare cash is a lot better. Mine (when I finish topping it up, having dipped into it recently) covers around 4 months’ worth of expenses and is mostly sitting in higher interest current accounts.
I’ve kept my credit cards however, as they will now be used as an absolute last resort.
Lance Corporal Jones https://en.wikipedia.org/wiki/Lance_Corporal_Jones
I always used to consider my credit cards as my ’emergency fund’, as both MrsShrink and I have a couple of 2 year 0% interest deals which would tide us out, and we ensure that our household outgoings could be managed by one of our salaries alone. Recent job changes and moderate anxiety about cashflow mean I’m now building my emergency fund, and trying to reduce my credit card balance. I still tend to use credit cards for big purchases though, as it’s 0% interest and offers protection.
My current struggle is whether to include your emergency fund when actually calculating your portfolio. Lots of people talk about 10+% of their allocation being in cash, but is this their emergency fund, or a bond locked away? With 5% interest rates achievable through current account juggling does your portfolio cash allocation have to be classically bonds?
Think I’m in agreement with John on credit cards. They can give you an additional buffer, convenience and time.
Once I had to arrange a flight for the missus & I to get us to the other side of the world within 24 hours to attend an unexpected funeral. Half an hour later, we had a flight booked with the local travel agent and a cab back home to pick up passports and essentials for travelling. 20 hours later thanks to a mixture of trains, planes and jeeps we got there. A credit card was absolutely essential in enabling that – and it gave me time to collate funds from various accounts to pay it off before it became due.
@Christian — Well if a credit card was absolutely essential then that was because you didn’t have cash savings. 🙂
As it happens I would have booked all those flights and hotels through a credit card anyway, for the protection. But I’d feel better knowing it was all backed by cash.
And as I say in the piece, there are times when credit cards don’t work. If for instance you find yourself in say a divorce at the same time you lose your job, or some other economic calamity.
Of course you might say it wouldn’t happen to you, and if you’ve abundant assets and low debts that may be true and the piece isn’t going to hit the spot to the same extent.
But the way I started the post was genuinely true. I did speak to some of these people doing student charity soup kitchens, and it was very eye-opening. There are people, not many, but some, who are top of the world in January and on their uppers by September (say). They are almost certainly running closer to the wind than most readers of this site, but certainly not closer than all effusive users of credit. 😉
@Peter — Ack, of course! And to think I’ve had him demoted here ever since V1 of this article was posted a decade ago. Cheers, fixed now!
It might be worth looking at fixed-rate Cash ISAs as a home for a real emergency fund. Unlike normal fixed-rate savings accounts, they normally allow withdrawals (I think that this must be an ISA rule: I’ve certainly never found one that didn’t). There’s always a penalty, so you wouldn’t want to use it for money you’re _likely_ to need early, but it’s a good backstop for the “roof falling in” fund.
I think as well spread it across a couple of banks in case a bank IT failure is your emergency
@TheFireShrink – Using bonds for your cash allocation goes back to the days when bond prices and equities moved in opposite directions. It’s probably still true that investment-grade bonds and gilts are less volatile and less risky than equities, but the price of all of them has been pumped up by QE etc. So I think it makes lots of sense to use actual cash for at least part of your cash allocation. OK, you may lose a bit after inflation, but (as TI/TA/guest? says) the cash/bonds are there for insurance, and normally I expect to pay for insurance.
As for including the emergency fund in your cash allocation, I’m not sure. You can’t spend it on a new boiler and rebalancing at the same time. Also, the size of your emergency fund needs to be driven by your potential emergency spending requirements, not as a proportion of your overall pot. If the markets crash by 50%, the price of a new roof probably won’t, and you don’t want to have to sell equities to fix it.
Nobody wants to sell equities at a loss, but there is no point being obsessed by it. Any normal emergency will only result in selling a small fraction of the equity, so you really won’t be affected overall by being a forced seller.
Its also a bad idea to think of rare, but predictable items, like a new roof or boiler as emergencies. Anyone doing financial planning should put aside money for such things with a 20 year horizon, and the best place for money over 20 years in equity. Its all about self-insuring for the vagaries of life, but investing the premiums.
Raising cash in a hurry can be surprisingly hard. I want to raise £100k in the next few months. I won’t get a mortgage as my employment history is primarily self employed. If i sell shares I will need to sell £150k of shares and pay a shed load in capital gains tax…… I obviously don’t want to do that.
I’ve a meeting with Barclays next week about borrowing money against my share portfolio. I gather I can borrow money at 2.7%. Happy days if Barclays don’t want to bum me with other charges.
I think having a credit card to use as an emergency fund is useful, but…
Many people (and I used to be one) put all there monthly spending on a credit card and then pay it off the following month gaining free credit and often points/cash back.
I believe there can be 2 problems with this. Firstly, you can very quickly be living a month in arreas, which can be a major problem if you suddenly lose your income. Secondly, spending using a credit card can feel less ‘real’ than spending using a debit card (or cash), which can psychologically encourage spending – the perils of which have been well covered previously on this site!
I was reasonably convinced by Jacob ERE’s assertion that he don’t need no stinkin’ emergency fund, he has a credit card. But I believe he was young, free and single at the time. I’ve forgotten which lady financial journalist it was who said “never take finacial responsibility for something that eats” but once you’re in that position I’d say cold, hard, cash beats the credit card option hands down.
Although I was intellectually convinced by Jacob’s CC argument, I could never bring myself to actually do it. But then I stupidly spent a lot of 2009 paying off my mortgage and into a cash ISA as well as my S&S ISA, I would be better off now if I’d dropped the cash ISA which was my emergency fund. I never used it, eventually put it in my S&S ISA.
It’s not always what’s right, it’s also what you can make yourself do.
I use NS&I Premium bonds to hold my emergency fund. Pays >1%, tax free, easily accessible. Save and forget (except for the day you need it!)
……plus small chance it may be the best investment you ever made!
“Marie Antoinette offering cake from within the palace walls when the rioters are at the gates should be your role model when investing”
You do know Marie Antoinette was guillotined?
Plus big chance it may be one of the worst investment you ever made… (inflation >>> 1%)
It’s quite right to think about inflation with one’s portfolio, but that is only one of many factors. An emergency fund is not there for returns.
At the moment you can put money into a cash account offering some level of access and earn around 1.25% to 1.5%. Currently, as for much of the past ten years, that’s below the rate of inflation. But it’s only c. 1% to 1.5% below. It’s not 10% below, say.
For much of the past ten years you’ve perhaps had to pay 1% to 1.5% a year — on the relatively small amount of money allocated to emergencies — as a cost of having an emergency fund. I think that’s a manageable price to pay for security. It is a consequence of living after the largest financial crash since the war.
Prior to 2008 it was easy to have money on deposit earning say 2-5% *above* the rate of inflation, if you were savvy about it. I think we’ll see such times again.
But anyway, the principle of the emergency fund is not negated by the fact that real rates are low right now. That’s just unfortunate.
Low rates do not mean that your boiler doesn’t blow up, or your kid doesn’t call from abroad saying they don’t have medical insurance, or you don’t find rising damp in your cellar.
We’re ten years into a global recovery and in much of the world (principally the US but also in aspects of the UK) the same time into a long bull market. People are confident, happy, and decry the idea of paying 1% or so a year for safety.
I get it. 🙂 But it doesn’t obviate the need for an emergency fund, nor its ideal structure.
If you’re in your mid-40s, say, and have 10-20x your annual expenses in accessible equities (i.e. not a pension) perhaps you feel happy to roll the dice on using credit cards and selling assets if you have to, or putting it on plastic, rather than having a few percent of that total exposure left in cash, reducing your annualised returns by a few basis points over the years. (Ahem.)
Your call. 🙂
Just don’t forget you can lose your job at the same time as shares fall 30% or similar, and you may then need to sell a bunch of them because you’re hit with a couple of financial meteors. This stuff happens, not often but it does.
It’s the same reason there are life jackets under a plane seat. Many people would probably choose to pack extra duty free shopping or save £10 on their baggage allowance and not have a life jacket available if given the choice. How often does a plane crash, they’d ask, perhaps reasonably? Basically never.
But if yours does ditch in the middle of the Pacific, how much would you give for that jacket then? Everything?
This is leaving aside all the other advantages of having a nice fat cash buffer between you and the vagaries of the economy and the markets, as mentioned in the article.
After buying my flat and furnishing it (argh!) I’m the least cash-insulated I’ve been for 20 years, and it has made me more hesitant as an investor, for example.
But each to their own. I don’t think alternative strategies to using cash are merit-less, let alone madness. But I do think they’re a repositioning of risk/reward, not clever ways to get out of the realities of life.
You allocates your money and takes your choice. 🙂
Why not use the (cashback/points) credit card to pay for the emergency, giving you time – if required – to get funds to the account to pay the card off ? Then even the emergency is making you a bit of dosh on the side, making it marginally less expensive.
@The Ig — If the credit card payment is backed by cash savings, then that’s what I’d do. The cash account is still the emergency fund. The credit card is a tool or conduit.
If the credit card is backed by nothing, so you’ll go into debt, or by the requirement to be a forced seller of assets at a time you didn’t choose, then you’re doing something that I wouldn’t recommend, personally.
For me I’ve Gone a half way house. 8 to 10k cash which is 3 to 4 months emergency fund and the rest in equities and p2p which i can realise alot more relatively quickly. Ere was a big factor in this. I had 20k in cash before but it didn’t make sense weighing up the risk of some random black Swan even vs the opportunity cost. Its a risk but a calculated one same as having half my mortgage in investments but not paying the mortgage. Its basically leverage and as long as my net worth (currently 460k) is comfortable vs the risk (about 8k in cash) then I’ll accept the risk In the hope of more gains,
p2p seems an unwise place to get cash in a hurry. My dabbling with p2p has left me with a scattering of accounts with bad debt that will take years to resolve, and even if the loan is being serviced, finding a buyer to sell to can be hard even in these stable, if fragile times. Not a good situation if you are losing your job as others are losing theirs. Even the companies with collective accounts don’t have the reserves if there is a loss of confidence and a run.
True and i’m not really counting it as part of my emergency fund. I also have 70k of equities as well. If i need more than 7k I’ve got credit cards and an overdraft. Itd have to be something pretty major
Totally agree about the emergency fund. A piece of wisdom imparted by my late father many years ago, and which I have passed on to offspring (though I have a suspicion they see us as the emergency fund for now). Even a small amount building up slowly brings peace of mind in my experience.
Great post.
However, I think that we all have our own interpretations of what our funds are.
I perversely include future income (salary, dividends, cashflow from investments…) so that I know roughly where I’ll be.
All told, I’ve typically got a negative emergency fund since I’m in hock to the HMRC (SA / Corp. Tax) and credit card bills are paid (in full). If I’m short, there’s the overdraft – not a good habit but it’s £5k of breathing room (at a 39.9% wheeze!)
It’s a balancing act but I get there – and the extra few k I have invested works that little bit harder for me (even if I do occasionally lose sleep over how to balance the books).
Have just rebuilt mine. No emergency thank heavens but kind of absorbed it into the main fund in the rush to make FIRE. Very bad.
What a timely refresh of this article – the information is priceless and all part of the big picture of financial knowledge, arguably the most important.
I’m literally a day away from the end of a contract role, with no idea as things stand what comes next.
Having a buffer/emergency fund has been a real comfort and one less thing to worry about. In my case, 4% cash of my total portfolio. Is that enough? probably not, just a smidge under three months expenditures I reckon. Ideally it would be more – plus a cash fund for fun and opportunities to invest. It does however give me the opportunity to explore and take the right opportunity rather than the first, likely after Christmas. I spent the last few months topping up the emergency fund this eventuality (although a little annoyed at the missed opportunity to buy more stocks cheaper)
Thanks again for the info!
Just dipped into ours to pay for a new kitchen as I didn’t want to sell the investments for it. Possibly not the most sensible option… Too often fall into the trap of thinking I’ll use a credit card for immediate issues and then sell some equities to cover it…maybe I’ll sell some to top it back up…
Well, I’ve 5% of my portfolio in cash and that’s my emergency fund. 15 months at regular burn rates, more in an emergency.
And we’ve 97/98% offset the Offset mortgage which is another couple of years.
We might be a little cash heavy…
I’m about 10% in cash, but would invest most of it if I was more confident in the timing/value. It also happens to be about 50% of my combined IO mortgage balance – just can’t bring myself to pay of a lifetime tracker (.9% over base)
I was holding a lot more in cash until 6 months ago – that’s about 15-20% down
Good news is ~ 2 years to Sipp and 7 for Final salary
When I changed my credit card a couple of months ago I thought that a good aiming point, before trying to get one at the X months salary level, might be a emergency fund equal to your credit card limit. At least that way you know you can pay off your expensive debt in full as one builds up that X months salary.
@MarkR, this is my baseline aim too. Nearly there but will have to start again when I get a new role sorted. Started tracking consumer debt/credit limit % (mostly, if not all, solar panel costs) v cash savings % in March 2021 with the aim of getting level at around the equivalent of 5%. Currently at 4% cash and 5.3% debt, compared to 1% (!) cash and 10% debt when I started tracking.
This is something that the dreaded premium bonds are quite good for – shove in the money and forget about it. Relatively quick access – sufficient for an emergency – but not _so_ easy you’ll spend it on a new car when you’re feeling flush. And a return of sorts which you can pocket the winnings of and enjoy the odd free pint or two on your fund.
Well what a difference 4 years makes looking back on my post above. Both in my thought process and also results.
Net worth more than doubled (I’m amazed by that in 4 years which includes a pandemic btw. truly a miracle ) but following an unfortunate inheritance ( less than a third of the increase above) finally received last month I’ve kept a little under half of it in cash . Part of it to clear an interest free debt that needs paying in October next year but the remainder is over a years net earnings which as you say above includes alot of luxuries and savings.
Definitely ‘too much’ but I’m going to drip feed the rest in by making additional monthly investments above my standard so the balance reduces very slowly as I get more confident with my current job and what I want to do longer term. I’m acutely conscious of the ravages of inflation but I think that will reduce tail end of next year so choosing to ignore it.
And no p2p investments at all anymore having got out of that ahead of alot of the issues in that sector thankfully though I never had very much in it to start with.
But definitely see the value of a big emergency fund. Also means you can for example ramp up your pension payments and use your cash fund to supplement your lower income for a while so allows you to be more aggressive as you say. I’m sold.
I have 10 months notice in my employment contract. And this is my emergency fund. Any other emergency can be financed from my salary.
Good advice.
Debt is insanity (or anything other than a well-calibrated mortgage).
Why would people choose to incinerate their money? Assuming they have a choice. The UK is a harsh place for the poor.
Anyone with an appropriately cynical view of the business world* will appreciate the freedom that comes from a substantial amount of liquid savings, say, 1 year’s worth in frugal mode. More likely than not, the time will come that the ladder of seemingly assured promotions suddenly ends. When your great company gets taken over by Private Equity who squeeze it like a lemon. Or when you want a career change and need time for additional education or trying out new things.
That freedom is indeed priceless, as they say.
*) i.e. anyone with half a brain and enough experience
@Peter — What if your employer goes bust and is unable to fund that period? Does it have money in escrow somewhere? (I doubt it…) What if you’re found guilty (perhaps constructively, but you can’t prove it) of some sort of dismissal-worthy transgression? Does it still pay out? There’s clear counter-party risk here.
Not advice etc, I don’t know your situation and you do you. 🙂 But what you’re describing is not an emergency fund, it’s just a promise.
@TI all great points. I work for government so probability of going bust is low. What if I’m found guilty…? Very low probability, I’m such a good boy 🙂 It would be like worrying that I will be run by a car when going to work. It could happen but it will not stop me going.
So yes, it is a promise, but very robust one. Almost like a promise from the bank where emergency fund is usually kept by most. After all, bank can also go bust. You could argue that then you have FSCS. Oh wait, looks like the promise we have been given comes from the same source 🙂
I guess there is no such thing as 100% safety when it comes to money. Where money are involved there is immediate risk of loosing them, no matter how well protected. Keep it under mattress and it can be stolen by a burglar and definitely by inflation. I guess diversification in a range of safe assets is our best bet to sleep well.
Topical updates for 2022 onwards: “But I can earn 8% on crypto staking, only idiots save cash”.
“My boiler has broken and I need £25,000 for a new air source heat pump”.
Anyway, I have a combination of instant access cash earning bugger all that would probably cover 2 months outgoings, and a Cash ISA covering a further 8 months. I’m afraid that ISA money will be going into a new 1 year fix once I can get 4%.
Plus a small amount in premium bonds, although pondering moving that into a Stocks and Shares ISA but investing in a low volatility short dated bond ETF so it could be used as an intermediate emergency fund yielding over 5% rather than sub 2.2% if you are lucky.
But I apologise for my minor rule breaking, and I think the guidelines in this article are spot on.
It is also right to highlight that your After Tax scrooge-mode minimum income requirement will be much lower than a gross salary based amount.
You can ratchet up or down a little I guess. When I was an IT contractor with a 1 week termination notice I kept more in an offset savings account.
If you are a permie with a 3 month notice contract, likelihood of redundancy pay on top and generous sick pay then you have a lot more of a shock absorber.
I maintain an interest-earning cash reserve equal to one year’s normal, no frills, expenditure.
However, in addition I used equity release (a “lifetime mortgage” from Legal & General but other providers available) for some necessary capex on my home a couple of years ago, but only used a relatively small portion of the facility that was made available.
The remainder of the facility is still on offer to me, and occasionally L&G come a-courting for a further drawdown but I have always blushingly spurned their overtures thus far. That’s not to say though that I wouldn’t surrender to their charms if personal fiscal pressures were to deem it necessary!
Setting up the loan facility doesn’t make its use obligatory but it’s reassuring to know that it’s there.
What impact, if any, should having two salaries in the family have on the size of the emergency fund?
Do you assume the worst case scenario and plan on losing both incomes?
@Bill G #52. My own thought was to base my fund on expenditure rather than income, so I planned to have 12 months of expenditure covering at minimum mortgage and utilities building up to average annual expenditure based upon 3 years.
I would suggest that if you don’t expect to use the money then it’s worth considering a 5 year cash ISA as the store rather than instant access. Rules mean that in an emergency you can access the money early if it’s a cash ISA (as opposed to non-ISA long term savings), usually at cost of 180 days interest, but you tend to get a better rate and avoid risk of paying tax on the interest.
I think expenses are a more accurate way of sizing your emergency fund, and currently have a year’s worth in cash (long story, best detailed elsewhere but it’s being deployed to fixed income as we speak), but I suppose 6mos income is close enough to 1yr expenses for a typical FIRE practitioner.
I don’t consider any employer guarantees (notice periods, insurance in service) as “emergency funds”, for the reasons TI outlined above, but also because redundancy is almost always the trigger for financial emergencies (at least in the UK, thank god for the NHS…) and you don’t want to rely on the employer’s good will in those circumstances.
Timely article, as I need to comb through a year’s credit card bills to update our ytd expenditures.
I keep 3 months of expenses in cash savings. I like the 5-year cash ISA idea btw – the chances of needing to use it are low enough that it appears it might be worth the risk of the 180 days interest charge to withdraw.
I also took out an interest only offset mortgage this summer which is 100% offset, it’s another source of emergency funds but obvs being naughty taking on debt to cover costs.
Depends on the level of emergency… For something potentially longer term such as a long term medical issue I wouldn’t want to be using the offset mortgage and compounding debt. But for 6 months, with a high likelihood of the issue being resolved after that, it seems low-enough risk to cover 3 months using cash and 3 more months using the IO offset, paying 4.2% (currently) on any money taken out.
After a new house purchase last year and also getting married, all within space of a month. I was down to zero on cash. Sold some equities to help finance the house purchase and kept the rest in the market.
I September just before the mini budget I completed a remortgage on on BTL at 2.2% interest rate for 5 years. Took 6 months emergency fund out of the BTL and lock it up in premium bonds.
If I were to save 6 months emergency funds it would have taken me about 3 years, so I remortgage the BTL to expedite the process. There was a lot of equity sitting in the property doing nothing.