How Much Should I Save as an Emergency Fund?
Life is full of unexpected events, and occasionally these can end up being costly surprises. Having an emergency fund is a great way to ensure you are financially prepared for sudden events and life’s little emergencies. This short guide will help you understand how much to save for an emergency fund.
How Much Should I Have in my Savings?
An emergency fund is aimed for those unexpected events such as a broken washing machine or even being made redundant. The money should help you get back on your feet and cover the costs of repairing broken things or just living for a few months without your usual income. With the help of a proper emergency fund, you can guarantee the sudden hurdles in your life won’t leave you financially worse off.
A good rule of thumb for the savings you should have in your emergency fund is to aim for three months worth of living costs. This amount covers smaller emergencies such as a broken machine, but it also gives you a nice buffer if you separate from your spouse or lose your job.
Calculating Your Required Sum
The easiest way to see how much you should have in your emergency fund is by calculating your monthly expenses. Look at your bank statements and see how much money you spend each month for essential things, such as mortgage payments, insurance payments and food.
You can then calculate how much money you need to survive for three months without your typical income. For example, if you currently need around £1,500 each month, your emergency fund should have savings of £4,500. The Money Advice Service has a great savings calculator that helps you see how long it’ll take to reach your desired savings.
Best Ways to Save for an Emergency Fund?
Of course, saving three months worth of income won’t happen overnight. But don’t worry; just start slowly and aim for one-month worth of income first and build up on that.
You’ll definitely need to find a proper savings account for your emergency fund. Therefore, you'll want to compare different options before you start saving. Discovering the best instant access savings accounts should provide you with a good enough rate of interest and ensure access to your funds whenever you need to.
Use comparison websites to find the best high interest savings accounts and make sure your emergency fund isn’t just sitting idle while you save.
Can I Have Too Much Saved in my Emergency Fund?
As mentioned above, three months worth of income is a great amount for your emergency fund. In fact, having savings worth much more won’t benefit you as much as you might think. An emergency fund should only be for the unexpected events and therefore, saving for other things, such as retirement, should take place separately.
This is mainly due to the poor interest rates even the best instant access savings accounts offer. You should definitely try to save and invest as much as you can, but don’t use your emergency fund as the main account for saving money.
Once you reach your emergency fund goal, you should start focusing on your other saving and investment goals. Maintain your emergency fund savings between three to six months worth of income and use limited access savings accounts and investments to boost your other savings.