How to build an emergency fund: a five-step guide

If you’re able to, building up an emergency fund is a simple way you can emergency-proof your budget, so unexpected costs don’t throw you into financial trouble. Having this fund can offer you a safety net when emergencies happen, and reduce the impact of unexpected costs on your mental health.

An emergency fund is a pot of money that you set aside for unexpected costs. This could include unexpected bills, home or car repairs, or other emergencies such as a sudden loss of income.

Having this fund means you don’t have to worry about how you’ll cover unexpected costs that spring up. With the funds already in the pot, you’ve already budgeted for whatever may come your way, rather than having to try and find the money out of nowhere when you suddenly need it. It can help take away some of the worry and ​‘what if’s, especially if your budget is tight.

Here are five steps you can take towards building an emergency fund that’s fit for the future.

When building an emergency fund, start by setting a target of how much you’d like to have in it. Of course, having more in the pot helps cover any larger unexpected costs, but don’t worry if you start small and build the pot up slowly.

How much you need in your emergency fund is individual to you and your circumstances, depending on the potentially unexpected costs you might face.

If you own a vehicle, you’ll want to make sure your emergency fund contains enough money for unexpected repairs. If you don’t, of course, this isn’t a cost you’ll need to set money aside for.

If you’re a homeowner, you might want to set aside money for unexpected building or appliance repairs, like a boiler, oven or fridge. If you rent your home, your landlord is usually responsible for fixing any structural issues, and any appliances that the home came with – but it’s definitely worth re-reading your tenancy agreement to check who is responsible for what! You may also want to set aside a certain amount of money for any excessive changes in mortgage or rental costs, or unexpected increases in bills.

An emergency fund is individual to each person, so have a think about what costs could crop up for you across different areas of your life, and set your target accordingly. 

Remember, too, that once you’ve used up some of your emergency fund, you’ll need to begin topping it up again so you eventually get back to the target you’ve set.

One way to start building an emergency fund is to look at your bank statements for the past few months. Have a look at how much income you received, how much you’re spending, and what you’re spending it on.

Then, create a written budget, writing down all essential monthly costs such as bills and food, then non-essential costs, any debts you need to pay off, and also your annual costs on things like car insurance, dental appointments, haircuts, etc. By doing this, you’ll get a clearer picture on how much you can afford to save per month towards your emergency fund.

It’s important to be realistic about how much you can afford to put aside each month towards your emergency fund – putting more than you can afford into it means you’ll just have to dip back into it to cover costs.

One vital money management skill that CAP’s free money coaching teaches is the idea of ​‘cutting back, cutting costs and cutting out’. These tips can help you save more than you’d think, with some simple tweaks to how you’re spending your money. 

Cutting back is the idea of buying something less, like hobbies or luxuries. Cutting costs is all about looking for cheaper alternatives and discounts on the things you need. Cutting out is about removing anything you don’t need entirely.

For more on how to do this, and for other tips and tricks to help you manage your money with confidence, find free money coaching workshops near you.

Not many people will be able to just save up hundreds or thousands of pounds into an emergency fund overnight. Saving isn’t a sprint – it’s a marathon. Whatever your target, it will take some time to build up your emergency fund to the level you’d like it to be – and that’s OK. Every pound you save on the way is going to make a difference in an emergency, whether you’ve saved £10 or thousands.

Along the way, make sure to celebrate every time you reach another savings milestone. Building up an emergency fund over several months or years takes consistency, dedication and commitment, but if you’re able to do so (even really slowly), it will help ease the worry of unexpected costs coming your way. You can make it fun, too – why not take on some money saving challenges and see how much you can save that way?

‘Five years ago, I was living out of my overdraft month to month. I had no savings and payday always felt like a million miles away. I was on a low income at the time and my money never seemed to stretch far enough.

Then the head gasket on my car engine blew. Anyone who knows anything about cars knows that’s an expensive repair. I found myself with a bill for £2,000, and alongside already being around £500–700 in my overdraft, I was suddenly in debt I couldn’t manage.

I felt completely overwhelmed with financial pressure, fear and anxiety over the situation. The experience opened my eyes to just how important it is to have money saved to cover unexpected costs, and that’s exactly what an emergency fund is – a pot of cash set aside to cover unexpected expenses. Back then, I didn’t know what an emergency fund was, but now it’s the core foundation of my finances, which has relieved me of so much worry and stress.

It’s taken me five years to reach my final emergency fund target, but just practising saving a little bit each month has massively helped along the way, as unexpected costs have come up. 

I recently received a £300 unexpected water bill due to an unknown leak, and at the same time had a car issue that was going to cost me £120. In the past, these two would have pushed me back into debt and really impacted my mental health, but having an emergency fund that I’d built up slowly over time meant I had it covered and didn’t need to stress or worry. It even meant I could be more confident in saving for my wedding, knowing emergency costs for other things were already covered.’

Developed from over 25 years’ experience, CAP’s free money coaching workshops will empower you to manage your money with confidence.

Our free, professional debt help service is run through local churches across the UK, offering you holistic, face to face support alongside a practical route out of debt. Find a centre near you to get started.