Your emergency fund

How much, where to keep it, and why it shouldn't be invested.

An emergency fund is money set aside in cash for things that go wrong. It's the least exciting part of a financial plan and the part that decides whether a setback is an inconvenience or a disaster.

Without one, every unexpected cost becomes debt or a forced sale of something at the wrong moment.

How much

The usual answer is three to six months of essential spending. Two things in that sentence matter.

Essential, not total. What the household needs to keep running: housing, bills, food, transport, childcare, insurance, minimum debt payments. Not holidays, not meals out. The figure is smaller than your normal spending, which makes the target less daunting than people fear.

Months of spending, not of income. You don't need to replace your salary, only your outgoings.

Lean towards the higher end if:

Your income is variable, commission-based or self-employed
Your household depends on one earner
Your employer sick pay is limited — check, using What you already have
Your job would be hard to replace quickly
You have dependants, or a property with expensive things waiting to break

Three months is defensible for a dual-income household with good sick pay and secure employment. Twelve isn't excessive for a self-employed single earner.

Where to keep it

Three requirements, in order: accessible, safe, and only then earning something.

Instant access savings account. The default, and usually right. Shop around — the gap between a high street current account and a competitive savings account is substantial, and switching takes minutes.

Cash ISA, if your savings interest would otherwise be taxed. Worth checking against the Personal Savings Allowance first, since many people don't pay tax on their interest anyway — see Dividend and savings tax.

Premium Bonds work for some people. No interest, but prizes are tax-free, the money is safe, and withdrawal takes a few days. Returns are unpredictable and average out below a good savings account for most holders, so this is a preference rather than an optimisation.

Not fixed-term accounts, which lock the money away. Not investments. Not anything that could be worth less when you need it.

Check the FSCS limit. Protection covers deposits up to a limit per person per banking group. If you hold more than that, spread it, and be aware that some brands share a banking licence.

Why not invest it?

The objection is reasonable: cash loses to inflation, and an emergency fund sitting there for a decade is a lot of lost growth.

The answer is what the money is for. An emergency fund isn't an investment — it's insurance against having to sell investments at a bad time.

Emergencies cluster with bad markets. Redundancy happens in recessions, and recessions are when portfolios are down. An emergency fund invested in shares is at its smallest precisely when you need it most, and using it means locking in the loss permanently.

The lost growth is the premium you pay for that insurance. It's worth it.

When to use it

For genuine emergencies: job loss, illness, an essential repair, an unavoidable and unexpected cost.

Not for holidays, Christmas or a new car — those are predictable and should be saved for separately. Mixing predictable costs into the emergency fund is how it quietly disappears.

And use it when you need it. People build a fund and then refuse to touch it, reaching for a credit card instead because spending it feels like failure. Using it is the entire point. Rebuild it afterwards.

Building it

If three to six months feels impossible, start with £500 and build. A partial fund is dramatically better than none — most emergencies are a few hundred pounds, not a few thousand.

A standing order the day after payday works better than intending to save what's left, because there's never anything left.

Once it's full

Stop. An emergency fund larger than you need is money doing nothing while inflation erodes it. Once you're at your target, direct new savings to the next step.

Then review it every year or two. Your essential spending changes, and a fund sized for your circumstances five years ago may be too small now.

This article is for general education only and isn't personal advice.