Emergency Fund: How Much Do You Need and Where to Keep It
An emergency fund is money set aside for unexpected expenses — a broken boiler, redundancy, car repair, or medical costs. Without one, these surprises often end up on a credit card at 20%+ APR.
The standard advice is 3-6 months of essential expenses (not income — just the costs you cannot avoid). For a household spending £2,000/month on essentials, that is £6,000-£12,000. If your income is volatile (freelance, zero-hours), aim for 6 months. If you have a stable job with sick pay, 3 months may suffice.
Where to keep it: An easy-access Cash ISA or high-interest savings account. The money must be accessible within 1-2 business days. Do not invest your emergency fund in stocks — you need it to be there when you need it, not subject to market drops. Start with a target of £1,000, then build from there — having even a small buffer changes your financial confidence dramatically.
Frequently Asked Questions
Should I pay off debt or build an emergency fund first?
Build a small emergency fund first (£1,000). This prevents you from going further into debt when surprises happen. Then focus on high-interest debt, then grow the emergency fund to 3-6 months.
Does my emergency fund earn enough interest?
The purpose of an emergency fund is safety, not growth. Even at modest interest rates, having accessible cash beats paying 20% APR on a credit card when an emergency hits.
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