Why it’s vital to have an emergency fund in place

Esther Shaw / 30 March 2016 ( 05 April 2017 )

Don't get stuck by emergency expenses with our guide to setting up an emergency fund and tips to make saving easy.



You may think there’s no need to have an emergency fund in place, but without one, you could soon come unstuck should the boiler fail, the fridge need replacing, or the car break down.

As a rule of thumb you should look to have a so-called “rainy day fund” of at least three months’ salary in place. This will serve as a safety net should something unexpected happen; it should also avert the need to resort to a credit card.

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Why an emergency fund is vital

With savings rates in the doldrums, many people feel there is little incentive to squirrel money away.

But if you take a short-term approach to your savings, and have only enough cash put aside to cover one month’s essential outgoings, you risk leaving yourself vulnerable.

Disaster could then strike if you were to lose your regular income.

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Have some money squirrelled away

By slotting away a rainy day fund with enough money saved to cover three months’ of expenses, this will give you the peace of mind and financial security of knowing you will be able to cope if something unforeseen happens.

A pot of cash savings provides a really important buffer against periods of financial insecurity which could otherwise be very destabilising.

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Save after payday

In the meantime, one of the best ways to get into the savings habit is by putting a little aside after every payday.

Better still, why not set up a direct debit to go from your current account into a savings account the day after you get paid?

As the money will hardly have touched your current account, you will be surprised how quickly you forget about the money going into your savings account.

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Which type of account should you use for your rainy-day fund?

Cash ISA

First off, you should make use of your individual savings account (ISA) allowance, as all interest is tax-free. From April 2017, you can slot up to £20,000 into an ISA in the current tax year (which ends on April 5). 

For more information on ISAs as an alternative saving option, please click here.

Easy access account 

Once you’ve used up your ISA allowance, you could also squirrel money away into an ordinary easy-access account, although you won’t benefit from the tax benefits you get with an ISA.

Don’t forget to shop around and compare the rates of interest available for the sort of sum you are looking to build; it’s important to make your money work as hard as it possibly can for you.

Check there are no penalties for withdrawing your money at short notice, as there’s little point having your emergency fund in an account where you have to give 90-days’ notice to get access to your cash.

What are the different types of ISA?

Tips to help you save

  • Review your finances and get to grips with your regular bills so you can accurately work out how long your savings would last for should the unexpected happen.

  • While you should prioritise paying off your debts before trying to amass lots of savings, it’s important to build up a reasonable emergency fund.

  • Resist the temptation to dip into your savings pot – and especially not to fund essential monthly spend.

  • Get into the habit of saving a regular amount each month.

  • Once you’ve managed to squirrel away a decent emergency fund, you should then build on this to help you plan for longer-term financial goals.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.