What is an emergency fund for?
An emergency fund is money kept aside, within easy reach, for costs you didn't plan and can't avoid: a lost or reduced income, an urgent repair, illness or a family crisis. It isn't for holidays, a new phone or a car you know you'll need to replace. Those are savings goals and deserve a pot of their own.
Its real job is to give you choices when something goes wrong. With a buffer, redundancy gives you time to find the right job rather than the first one. A large repair bill becomes an inconvenience rather than a reason to reach for a credit card. And any investments you hold can stay put through a bad patch instead of being sold at the worst possible moment.
That last point is why the emergency fund comes before investing in every personal financial plan we prepare. Money you might need next month shouldn't be in anything that can fall in value.
How do you work out your essential spending?
Work out your essential spending from your bank statements. Go through the last three months and add up what you'd still have to pay if your income stopped: housing, energy, food, transport, insurance, childcare, phone and internet, and minimum debt repayments. Divide by three for a monthly figure, then add a monthly share of essential yearly bills.
Be honest about what counts. A gym membership you'd cancel within a week isn't essential; a prescription or a school bus pass is. Spending you would cut in a crisis, such as eating out or entertainment subscriptions, stays out of the figure, because in a real emergency you'd cut it. A few costs are easy to miss:
- bills paid yearly or quarterly, such as insurance renewals or local property charges, converted into a monthly amount;
- costs that would rise if you lost your job, such as health cover your employer currently pays for, or travel to interviews;
- minimum payments on every debt, including ones you're planning to clear.
Basing the fund on essentials rather than on your full take-home pay usually gives a smaller, more reachable target. It's also more accurate: in a crisis you would be living on essentials, not on your normal budget.
How many months should your emergency fund cover?
How many months your fund should cover depends on how quickly you could replace lost income and how many people rely on you. Someone with a steady job, no dependants and a partner who also earns may manage with a few months of essentials. A self-employed sole earner with children may want considerably more.
| Your situation | Usually means fewer months | Usually means more months |
|---|---|---|
| Income | A salary in a stable job, with a notice period and redundancy terms | Self-employment, commission, seasonal work or irregular shifts |
| Household | Two earners who could cover essentials on either income | A single earner, or dependants who rely on you |
| Job market | Skills that are in demand where you live | A specialised role that could take months to replace |
| Home | Renting, with the landlord responsible for repairs | Owning, especially an older property |
| Health and insurance | Good health, and cover that pays out if you can't work | A health condition, or no protection for your income |
| Other safety nets | Family who could genuinely help, or other savings you can reach quickly | No one to fall back on |
Common guidance ranges from three to six months of essentials, and some people prefer a year. There's no prize for the biggest fund, though: money beyond what you need here could be working towards other goals. Pick the number that would let you sleep at night, then test it against the table.
What does an emergency fund target look like in practice?
Take a fictional couple renting a flat, one salaried and one self-employed, with one child. Their essential spending comes to $2,400 a month. Because one income is irregular, they choose five months, $12,000, then add $1,500 for a car repair they expect within the year, giving a target of $13,500. Every figure is invented.
| Item | Amount | How it was worked out |
|---|---|---|
| Rent | $1,150 | Monthly, from bank statements |
| Food and household basics | $480 | Three-month average, takeaways left out |
| Transport | $210 | Fuel, fares and parking |
| Childcare | $200 | After-school care |
| Energy and water | $190 | Three-month average |
| Insurance | $60 | Yearly premiums divided by 12 |
| Phone and internet | $60 | The cheapest contracts they'd keep |
| Minimum debt repayments | $50 | One credit card |
| Essential spending per month | $2,400 | Total of the rows above |
| Five months of essentials | $12,000 | 5 × $2,400 |
| Known bill within the year | $1,500 | Expected car repair |
| Emergency fund target | $13,500 | $12,000 + $1,500 |
If $13,500 feels out of reach, that's normal. Building a fund over a year or two, with a smaller first milestone, is common and perfectly sensible. Having a figure tells you what 'enough' looks like, so you know when to stop adding to this pot and move on to the next goal.
Illustration only: a fictional household with invented figures. Your own target depends on your spending and circumstances.
Where should you keep an emergency fund?
Keep your emergency fund in cash, in a savings account you can reach within a day or so, at a bank whose deposits are covered by the deposit guarantee scheme where your money is held. Keep it apart from your everyday account. It shouldn't be invested, locked away for years or held in crypto.
Easy access matters more than the interest rate here. A slightly better rate on an account with a long notice period, or a fixed term you can't break, defeats the purpose if the boiler fails tomorrow. Some people keep a month or two in an instant-access account and the rest in one with a short notice period, which works only if that notice is short enough to bridge the gap.
Check how deposit protection works where you bank: the limit per person and per bank, and whether two brands share one banking licence and therefore one limit. Keep the fund within that limit at any single institution. The scheme's own website sets out the rules; type its address yourself rather than following a link.
Investments, even cautious ones, can fall in value just when you need the money, often during the same downturn that puts jobs at risk. Crypto can move much further and faster. Keep both well away from this pot.
Should you build an emergency fund or pay off debt first?
For most people the sensible order is a small starter buffer first, then clearing expensive debt such as credit cards, overdrafts and high-cost loans, then building the full fund. Keep making every minimum payment throughout. Cheaper, longer debt such as a mortgage usually doesn't need clearing before you build your emergency fund.
Why not clear the debt first and skip the buffer? Because without any cash at all, the next unexpected bill goes straight back onto the card and the cycle starts again. A modest buffer breaks that loop.
Build a starter buffer
Aim for a first milestone, perhaps one month of essentials or enough for a typical repair, so that a small shock doesn't land on a credit card.
Clear the most expensive debt
Put every spare amount towards the debt with the highest interest rate, while paying the minimum on everything else. Interest on expensive debt usually costs far more than savings earn.
Build the full fund
Once expensive debt is gone, redirect those repayments into savings until you reach your target.
Then look further ahead
Only after that does investing come into the picture, and only with money you won't need for years.
If debts already feel unmanageable or you're missing payments, contact your lenders early and look for an independent, not-for-profit debt adviser in your country before anything else.
How can you build an emergency fund when money is tight?
Build it in small, automatic steps. Set up a standing transfer into a separate savings account on the day you're paid, and add any windfalls such as a tax refund or a bonus. Set a first milestone you can reach within a few months, then raise the transfer whenever your income rises or a debt is cleared.
A small transfer that happens without a decision each month tends to outlast a big one you have to remember. Name the account after its purpose, too: a pot labelled 'emergencies only' is harder to raid on a whim.
Look for one or two regular costs you could cut or switch, and send exactly that amount to the fund, so the saving doesn't quietly disappear into everyday spending. When a debt is paid off, keep paying the same amount, but to yourself.
If even small transfers aren't possible yet, the budget needs attention first. Our article on making a personal financial plan starts there.
When should you use the fund, and how do you refill it?
Use the fund when something is unexpected, necessary and urgent, and you'd otherwise have to borrow. A planned holiday fails that test; a job loss or a broken boiler passes it. After using it, pause other saving goals if you need to and refill it first, then review the target once a year or whenever your life changes.
Don't feel guilty for using it. Spending the fund on a real emergency is a success: it did exactly what it was built for. The mistake would be leaving it empty afterwards.
Revisit the target when your costs shift: a move, a new baby, a new job, a pay rise or a partner's change of work. Any of these can raise or lower your essential spending, and with it the right size for your fund.
How can Ownvance help?
Ownvance can work out your emergency fund with you as part of a personal financial plan: your essential spending from real figures, the number of months that suits your situation, where to hold the fund, and how it sits alongside your debts and goals. You keep a written plan and a simple spreadsheet you can update yourself.
That's our personal financial plan service. Once your fund is in place, our investing education sessions can help you understand the options for money you won't need for years, though we never tell you which product to choose.
To start, get in touch by email with a rough idea of your monthly costs and what you'd like to sort out. The introductory consultation is where we agree what your plan will cover.