Emergency funds — the what, how and why

An emergency fund is money that’s been set aside to cover unexpected expenses, such as repairs or being unable to work due to illness. It’s there to provide you with a financial safety net.

Why should I have an emergency fund?

Having an emergency fund available means that you won’t have to get into debt or make difficult financial decisions in the event of the unexpected.

How much should I hold?

We would usually recommend holding between 3 and 6 months of expenses in an emergency fund. If you have less, it might not be enough to cover any bills. However, if you hold too much in cash it may not keep up with rises in inflation.

Where should I hold it?

It’s often a good idea to have a separate account for your emergency fund. That way, you’re less tempted to dip into it. It needs to be easy to access so for most people the best place is a savings account.

What if I don’t have one?

If you haven’t got one already, don’t worry, you can start saving now. We’d recommend starting to put aside an affordable amount each month until you have enough. Setting up a standing order each month on pay day can be a good idea, as that way, the money is set aside immediately and there’s less temptation to spend it.

When should I use my emergency fund?

It’s there to help you when you need it, so don’t feel bad about using your emergency fund. However, make sure it’s a genuine emergency. It can be useful to decide in advance what you will and won’t use the emergency fund for. And remember, if you do use your emergency fund, make sure you start topping it up again until it’s back at the right level.

To find out more about Future, and how financial planning can help you, visit www.thefuturefp.com