How to build an emergency fund for unexpected costs
Life doesn’t always go to plan. A punctured tire. A leaky roof. A broken-down washing machine. Things can crop up every now and again – and without a safety net, it’s easy for a one-off cost to knock your plans off track.
That’s where an emergency fund comes in. Even a small pot of money set aside gives you options and control. A way to bring yourself peace of mind during a stressful situation. It’s also something that can stop one unexpected cost from becoming a long-term financial problem.
In this blog, we’ll break down what an emergency fund is and how to build one that works for you. If you are struggling with unexpected costs, please don’t hesitate to get in touch.
What is an emergency fund?
An emergency fund is a pot of money – a savings fund – set aside to help when life takes an unexpected turn.
Your emergency fund should be kept separate from your day-to-day cash to ensure the funds are there for you if you ever need them.
If an unexpected cost comes up, it can be tempting to take out a loan to pay off the expense. It’s not always easy to dip into savings you’ve worked hard to build up – but that’s what an emergency fund is there for. It’s a way to reduce the damage when something goes wrong.
Some people also find it helpful to set up a second savings pot for fun things or future plans. That way, your emergency funds feel separate – and you’re less likely to hesitate when you need to use it.
It also helps to pay off your debts with your savings. Moneysavingexpert.com breaks it down by explaining that:
- A £1,000 debt on a credit card at 23% costs £230 in interest over a year
- £1,000 in a savings account at 5% earns £50 in interest over a year
So, if you pay off the debt with savings, you’d be £180 a year better off. Having the money there relieves the stress and puts you in control of moments that feel like they’re spiralling. It gives you the breathing space while you’re figuring things out.
How do I set up an emergency fund?
Here are some steps to get started.
Set a goal of how much you’ll need
Have at least 3 months’ worth of living expenses in an emergency fund.
If your total monthly outgoings – including rent and any bills – are £1,500, aim to have at least £4,500 set aside in an emergency fund.
This isn’t a hard and fast rule. If you can save more than 3 months’ worth of living expenses, then that’s great – but even a small emergency fund is better than nothing, so don’t feel discouraged if you can’t put aside that much at this moment.
Decide how much you can feasibly save each month
The best way to do this is to plan. If you are thinking of following the recommendation of having a minimum of three months’ worth of living expenses saved, then accurately calculate what that is.
How much do you pay in rent? How much does your food shop typically cost? How much do you pay for your phone bill each month? Being thorough gives you a realistic target. Once you know the total, break it into monthly or weekly amounts that feel manageable.
Here’s a simple calculator to help you plan this:
- Add up your essential monthly costs:
- Rent/mortgage: £600
- Food: £200
- Bills & transport: £150
- Other essentials: £50
Monthly total: £1000
- Multiply by the number of months you want to cover (e.g. 3):
Target fund: £3000
- Divide by the number of months you want to save over:
Monthly saving goal: £500
*Example budget calculator
Even £5 or £10 a week adds up over time. The key is consistency. Start small if you need to, as you can always increase it later if things change.
Choose an account that works for you
We have a range of savings plans available for our members.
Save at your own pace, whether it’s weekly, monthly or whenever else works.
As a member-owned, not-for-profit credit union, we make sure that profits benefit you, not the pockets of distant shareholders. Any surplus we make is reinvested into our communities, which may be in the form of a yearly dividend payment. The more you have saved in your emergency fund, the more you could receive as a dividend.
Your money is also safe with Beacon. All savings are protected by the Financial Services Compensation Scheme (FSCS) up to £85,000.
Keep it topped up
If you do dip into your emergency fund, try to build it back up when you can.
It’s also worth checking in with your fund from time to time, even if it feels like you’ve saved enough.
Life changes – and so can your monthly expenses – so reviewing your savings regularly means you’re more likely to stay covered. Keeping it topped up helps you feel confident that whatever comes your way, you’re ready to handle it.
Build financial resilience with Beacon
We give you the options to help make better decisions. Our knowledge hub is a fantastic place to start if you’re looking to build financial stability. You’ll find simple guides and handy tools to cover the basics to manage your money better and build resilience for whatever comes your way – including those unexpected costs.
See how we can support you with an emergency fund and more.
