How Much Should I Have in an Emergency Fund?





It’s time for another reader question! 

How much should I have in my emergency fund?

This blog is dedicated to answering it…

An emergency fund is really important to help you out if you lost your job or had an unexpected major life event to deal with. But how much should you have, and where should you keep it? As with anything to do with personal finance – it depends. It’s very specific to who you are and your circumstances. However, here’s a rough guide to give you something to think about.

What Is Your Money Personality?

Understanding this is really important when it comes to knowing how much you should have in your emergency fund. If your money personality type (such as the Accumulator) is someone who a) hates the idea of using credit cards and b) would freak out at the idea of losing your job, you would need more in your emergency fund than someone who is less concerned.

Equally, if you have dependents, or if losing your current job meant you might struggle to find a new one, then a bigger emergency fund — perhaps 6-9 months’ worth of expenses — would make more sense to you.

Essentially, you need to be honest with yourself. I want you not to feel stressed around money, but rather to have money freedom and no stress around your finances. How much would you need to have in the bank to feel comfortable?

Some people may never feel comfortable, such as Rulers and Accumulators. It might be that no matter how much money you have in the bank, you still wouldn’t feel secure. In which case, you need to work on your mindset — because having too much money sitting dormant in an account is detrimental in itself.  

How Much Should You Have in Your Emergency Fund?

At the very least, you should start with £1,000 to cover you for small, unexpected emergencies. After that, you should look to cover yourself for the number of months’ worth of living expenses (or income) that you feel comfortable with.

For example, if you earn £2000 a month and your outgoings are £1500 a month, you could aim for 3 x that amount, so £4,500. Alternatively, you might be more comfortable with 3 or 4 multiples of your take-home pay. That way you’re covered not only for your bills but also to have money for leisure time, etc.

Having Too Much in Your Emergency Fund Could Be a Problem

The recommended multiples of your income or expenses varies. Dave Ramsey recommends you aim to save up to 3 – 6 months’ worth of expenses, whereas Suze Orman says 12 months. Personally, I think it can be overkill to store too much money in a savings account. Because with interest rates as low as they are right now, savers’ money is losing value thanks to inflation.

It’s what I like to refer to as the “Freddo effect”. The Freddo chocolate bar now is not the same price as it was 10 years ago. I remember as a child, they were 5p. Now they’re 25p. It’s the same product but it costs more thanks to inflation, and the same goes for groceries and bills. Your grandparents would have been able to afford to buy a house for £10-£12K (and that would have been a stretch for them!), whereas today, you would expect to pay around half a million for the same property.  

If you have savings in an account with an interest rate of 0.5%, and inflation is rising at 2.0 – 3.0% a year, your money is not growing at the same rate, and is therefore losing value. You’re losing the difference between inflation and what you’re being paid in interest. £50,000 might seem like a lot right now, but in 20 years’ time, that money will not buy you the same as it would today.

Ultimately, having a lot of money in an emergency fund might make you feel better, but having too much could be doing you a disservice due to that money losing value.

Another Factor to Consider

In the UK, your money is protected up to £85,000 by the Financial Services Compensation Scheme. If you have more than that, you need to make sure you’re spreading your money around because you are only covered per institution.

So there are downsides to having lots of money sitting around in savings.

Where Should You Keep Your Emergency Fund Money?

Some people are tempted to invest a large sum of money, which I can understand as it makes more sense to grow it, than leaving it dormant to lose value. However, the whole point of an emergency fund is that you will need that money immediately. If it’s tied up in an investment, it might take a few days before you can get that money out. It could take a week — or more — especially if it’s tied up in property.

So where should you keep it? Well, there are plenty of options, but I’d recommend you do some research online for the best savings accounts. Money Saving Expert is an excellent resource for this, as it’s always updated with the latest new offers. 

The best rates are often available to new customers, so if you are savvy enough, you could move your money around and grow it that way (to a certain extent). There can be limits on the amount of interest you might receive, and you need to be honest with yourself as to how likely you are to commit to seeking out the best deals on a regular basis.

Premium bonds can be a good place to keep your money. They’re Government-backed, so are considered very safe because it is them who would have to pay you back your money. It sits in an account and gets entered into a prize draw where you can win anything from £25,000 up to £1,000,000, and it’s all tax-free.

The more money you put in, the more chances you have of winning, though the maximum you can hold in bonds is £50,000. Most people won’t need that in their emergency fund, though, so it’s worth exploring.

Is it a Good Idea to Use a Credit Card for an Emergency Fund?

Using a credit card to cover an emergency is great if that’s all you use it for, and you pay the balance off in full, or have 0% credit card which you can commit to pay off during the offer term.  The downside with using a credit card is that not all emergencies can be covered with one. Take American Express, for example. Not every shop accepts this as a form of payment, so if you are relying on this, then you can’t pay.

Credit cards are good for protecting you when you make a purchase. For example, if you booked a holiday, or bought an expensive item, that protection can help to get your money back if there’s a problem as opposed to if you used a debit card, or cash. A credit card can also help you build your credit score if you’re paying it off in full every month, as this is documented favourably on your credit file.

But realistically, I believe that having savings in a bank account is the best way forward. I’d much rather have money saved in the bank than use a credit card, because it gives me that extra level of security, and frees me from having stress around money.  

Hopefully that’s given you a good idea as to how much you need to save, and where you should put your money. If you have any more questions, please get in touch at [email protected], or alternatively, come and join our Facebook group, where we chat about anything to do with money.

Bye for now,




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2 thoughts on “How Much Should I Have in an Emergency Fund?”

  1. When you mentioned the Freddo effect I assumed it was going to be a reference to the Godfather movies where Freddo gets whacked while he is out fishing! I was wondering how even someone as clever as you was going to work that into a money maxim! I was kind of relieved when it turned out to be a candy bar. Emergency funds are very personal, I remember early in our careers we reached a milestone when our cash in savings exceeded what we owed on our house. We live in a low cost of living part of the rural southern US so that wasn’t as much cash as you’d think, but it still felt like a nice amount knowing we could write a check to pay off the house, which we did not do. Now in retirement we’ve got over six years of cash, which is a lot but bonds aren’t doing much so its about the same and still is a small part of our portfolio. Very balanced coverage. Its only fair that you mentioned that credit can act as an emergency fund, because its true. Like you I think that’s not the best path but there is some math to support it. Nice post!

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