Your guide to emergency funds
From a broken down car to an urgent home repair, financial surprises can happen. And that’s where an emergency fund comes in – providing you with a cushion and giving you peace of mind. This guide will walk you through what an emergency fund is, how much you should have in it, and how to set one up.
What is an emergency fund?
Simply put, an emergency fund is a pot of money you set aside specifically to cover unexpected and urgent costs. Think of it like a financial safety net, ready to be used whenever life throws you a curveball.
How much should I have in my emergency fund?
While there’s no one-size-fits-all answer, a widely recommended guideline is to aim for three to six months’ worth of essential living expenses.
To work this out, start by calculating your essential monthly outgoings. Include costs like:
Rent or mortgage
Bills
Groceries
Transport
Debt repayments
Once you have a total, multiply that by three and then by six. This’ll give you a range for your target emergency fund. For example, if your monthly expenses are around £1,500, your target emergency fund would be between £4,500 and £9,000.
If you’re not sure whether to shoot for the lower or higher end of this scale, think about things like:
Job security: if your employment is stable, three months might feel like enough. But if your income is unpredictable or unsteady, you might feel more comfortable having a bigger buffer.
Your family: if you have kids or other family members who rely on your income, a bigger emergency fund can offer greater security.
How to build an emergency fund
Set a goal: determine your target amount based on your monthly expenses and how much money you want to have behind you. Having a specific number in mind will help you stay motivated.
Balance your budget: understanding where your money is actually going is the first step towards seeing how you can free up cash for your emergency fund. Read our tips on how to budget here. Monzo also has handy tools that can help you track your spending and categorise your transactions, giving you a clear picture of your outgoings.
Find ways to cut back: after you’ve looked at your expenses, think about whether you’ve spotted any places you can make small cutbacks. For example, could you reduce your takeaways or subscriptions? Every little bit you save can go towards your emergency fund.
Automate your savings: treat your emergency fund contributions like any other essential bill – set up a regular transfer from your current account and send it to a dedicated pot. Even a small amount each week or month will add up over time and, better yet, it helps you build a habit. And by automating your deposits, you don’t even have to think about it!
Stay consistent: don’t get discouraged if progress feels slow. The important thing is to be consistent.
Where to keep your emergency fund
Once you start building your emergency fund, you'll need to decide where to keep it. The ideal place should offer easy access to your money as soon as you need it, while still keeping it separate from your everyday spending. Here are some options:
Monzo Pots: you can create a dedicated Pot in your Monzo app to keep your emergency savings separate from the rest of your money. You can also lock your Pot to stop you from dipping into it.
Instant access savings account: these accounts allow you to withdraw your money quickly and usually offer some interest on your balance.
Cash ISAs (Individual Savings Accounts): these accounts allow your savings to grow tax-free. Cash ISAs are a good option if you want to benefit from tax-free interest while still having easy access to your money. Just remember that the taxes you pay depend on your individual circumstances, and government policy could change in the future.
UK residents only. Ts&Cs apply.