How Much Should You Have in an Emergency Fund?

Nobody gets particularly excited about an emergency fund.

There's no new kitchen at the end of it.

No holiday.

No new car.

It's money sitting in an account doing, apparently, absolutely nothing.

Then the boiler stops working.

The car fails its MOT.

Your washing machine fills itself with water and decides that's as far as it's prepared to go.

Or, more seriously, somebody in the household suddenly loses their income.

That's when boring money becomes very useful money.

So how much should a Peterborough household actually have put aside?

A common starting point is three to six months of essential household spending.

But before you reach for the calculator and frighten yourself with a five-figure number, there's an easier place to start.

Forget Your Salary - What Does It Cost to Keep Your Household Going?

If you earn £3,000 a month, you don't necessarily need £9,000 to cover three months.

The calculation isn't based on your salary.

It's based on your essential spending.

In other words:

“If our income suddenly stopped, what would we still have to pay?”

Start there.

That might include:

• rent or mortgage

• Council Tax

• gas and electricity

• food

• essential travel

• insurance

• childcare

• minimum debt repayments

• other bills you can't realistically stop paying

Leave out the things you'd cut back on during a genuine financial emergency.

Meals out.

Subscriptions you could cancel.

Clothes you don't need.

Weekends away.

The emergency budget isn't supposed to reproduce your normal lifestyle indefinitely.

It's supposed to keep the household running while you deal with whatever has happened.

Here's What the Numbers Look Like

Say your essential household spending comes to £1,500 a month.

Three months = £4,500

Six months = £9,000

If your essentials are £2,500 a month:

Three months = £7,500

Six months = £15,000

And this is usually the point where someone thinks:

“Excellent. I'll just find £15,000 down the back of the sofa.”

Those numbers can look enormous when you're starting from nothing.

So don't make £15,000 your first goal.

Start With £500

If you currently have no emergency savings, £500 matters.

It isn't going to replace several months of income.

But it might pay for a car repair.

An unexpected household bill.

A broken appliance.

Or another everyday problem that would otherwise land on a credit card.

Once you've got £500, aim for £1,000.

Then start working towards one month's essential spending.

Then two.

Then three.

The three-to-six-month figure is a useful destination.

It doesn't have to be where you begin.

That's a much less intimidating way to approach it than staring at £9,000 and deciding there's no point starting because it'll take years.

Why Three to Six Months?

MoneyHelper currently suggests having enough emergency savings to cover at least three months of essential outgoings, with three to six months commonly used as the target range.

But there's no single number that works for every Peterborough household.

Imagine two people earning exactly the same salary.

One has a relatively small mortgage, no children and two incomes coming into the household.

The other rents, has two children, pays for childcare and relies on one income.

Same salary.

Completely different financial risk.

Someone with irregular freelance income might also want more breathing room than somebody with a very secure monthly salary.

So think about your household.

How many incomes are coming in?

How secure are they?

How many people depend on that money?

How quickly could you reduce your spending?

And how difficult would it be to replace your income if you lost it?

Those questions are more useful than copying somebody else's emergency-fund number.

What If You've Got Credit-Card Debt?

This is where the advice needs a little common sense.

Suppose you've managed to save £5,000.

Great.

But you've also got £5,000 sitting on a credit card charging a high rate of interest.

Building an ever-larger savings account while expensive debt keeps accumulating interest may not make financial sense.

MoneyHelper advises dealing with expensive debts before concentrating on building a large emergency fund.

But I'd distinguish between a large emergency fund and having nothing at all.

A small cash buffer can still be useful.

Otherwise, you pay off the card, the car breaks down the following week and hello again the repair goes straight back onto the card.

So if debt is part of the picture, look at the whole situation rather than blindly following a rule.

And if you're struggling with debt repayments, get free debt advice rather than trying to solve everything with a savings challenge.

Where Should You Keep Emergency Money?

An emergency fund needs to be available when there's an emergency.

Obvious, perhaps, but it rules out putting all of it somewhere you can't easily access.

An easy-access savings account is the straightforward option.

Ideally, keep the emergency fund separate from your everyday spending account.

Not because anything magical happens when you move it.

It simply makes the money harder to accidentally spend.

If your emergency savings are sitting beside the money for Saturday night, there's always a temptation to borrow £80 from yourself with the solemn promise that you'll put it back next payday.

We've met Next Payday.

Next Payday has plans of its own.

Automate It

You don't need to wait until you have a brilliant month financially.

Because when exactly is that arriving?

Set up a standing order shortly after payday.

£25.

£50.

£100.

Whatever your household can actually sustain.

I'd rather see someone save £40 every month for a year than decide they're going to save £300, manage it twice and abandon the whole idea.

And when something changes a debt gets cleared, childcare costs fall, you get a pay rise increase it.

Slow is fine.

The emergency fund doesn't care how impressively it was built.

What Actually Counts as an Emergency?

This is where the fund can mysteriously develop several different purposes.

Boiler broken?

Emergency.

Unexpected essential car repair?

Emergency.

Sudden loss of income?

Definitely.

Festival tickets because everyone else has already booked theirs?

We may need to refer that one to the committee.

Decide what the money is for before you're tempted to use it.

There's nothing wrong with saving for holidays, Christmas, a new car or home improvements.

But give those things their own pots.

Your emergency money has one job:

stopping an unexpected problem becoming an expensive debt problem.

Work Out Your Number Tonight

This doesn't require a spreadsheet with 47 tabs.

Look at your bank account and bills.

Add up one month of essential spending.

Then multiply it by three.

That's your first serious emergency-fund target.

If you eventually want six months, double it.

But if you're starting from zero, forget both numbers for a moment.

Aim for £500.

Then £1,000.

Then one month.

Build from there.

Because the best emergency fund isn't the biggest number somebody on the internet tells you to have.

It's the money that's sitting there on the horrible Tuesday morning when something goes wrong and you realise:

“Okay. We can pay for this.”

That's what the fund is for.

How Much Made You Feel Safer?

We'd like to hear from Peterborough households who've built an emergency fund particularly people who started small.

What was your first target?

£500?

£1,000?

One month's bills?

And did having that money ever save you from putting an unexpected expense onto a credit card?

Tell Peterborough Spotlight what worked for you without sending us any private financial or account information.

Real examples could help us build a follow-up showing how Peterborough households are creating a financial buffer without pretending everyone has thousands of pounds sitting around waiting to be saved.

Comment below ...