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How to build an emergency savings fund


In this climate of uncertainty, it’s more important than ever to plan for all eventualities, including any unexpected costs. An emergency savings fund can reduce the need to borrow money or make difficult decisions during an already challenging time. The amount you will need depends on individual circumstances but here are some tips to get started.  

Set your savings goal

We would recommend you have at least 3-4 months’ worth of general living expenses in an emergency fund. If your monthly expenses total £2,500 inclusive of rent or mortgage and all other costs, you can aim to save around £7,500 - £10,000. It may take several years to build up your emergency fund, but any savings are better than nothing in the event of unexpected events.

We also acknowledge competing factors when it comes to your finances, and the need to contribute towards long-term savings such as pensions.

Work out how much you can afford to save

Once you’ve set your goal, the next step is to establish how much you can afford to save each month. Have a look at your monthly expenditure and work out how much ‘disposable’ income you have after you’ve been paid and any areas where you could reduce spend. It’s also worth considering how this has changed over the last few weeks and whether you have more money spare than you did before due to reduced spending during lockdown.

The 50/30/20 savings technique can be a good place to start when looking at how much to save. This technique assumes that 50% of income is usually spent on essentials like a mortgage, bills and food, while 30% is spent on non-essentials, leaving 20% that can be saved. For more information on the 50/30/20 rule take a look at our article The 50/30/20 rule: what it is and how to use it.

Start building up your fund

Based on the amount you’ve chosen to save, the next step is to work out how long it will take to reach your savings target. Work out a date you hope to achieve this by and set milestones to help keep on track. A good way to add to the fund regularly is by setting up a standing order so money will automatically be transferred to your savings account each month. Ideally, set this up for the day you get paid so that you’re less tempted to spend it.

Look at your savings account options

Once you’ve started saving, you will need to look at savings account options available to earn interest on your emergency fund. While fixed rate products offer higher interest, they might not be the best option if you need access to your money at short notice to cover an emergency. One option available is to split savings – once you’ve saved up a few thousand, you can keep some funds available in an easy access account for any unexpected costs and put the rest into a high interest savings account to make your money work harder. Other options you can consider are cash ISAs, which offer tax-free savings, and notice accounts, which allow access if you provide between 30 and 180 days’ notice of withdrawal.

Keep the fund topped up

If you have to use part or all of your emergency fund, remember to top it up again when you’re able to, so that it continues to grow. It’s also advisable to regularly revaluate your financial situation in case you need to increase or decrease your emergency fund to reflect any change in circumstance.  

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551