We have all heard about the importance of saving for a rainy day. Knowing how to build an emergency fund when money is tight can feel challenging, but it is achievable with the right strategies.
An emergency fund is savings set aside specifically for essential, unexpected payments. This can range from emergency medical expenses to a boiler breakdown. Having an emergency fund on hand allows you to pay for these essential expenses without relying on credit or going into debt, but building your emergency fund does require some prior planning.
The good news is that when building an emergency fund, even small amounts can add up quickly, so you can achieve financial security and be prepared for unexpected expenses.
So, how do you build an emergency fund when money is tight? And how can you avoid common mistakes when it comes to building your emergency fund?
What Is an Emergency Fund?
An emergency fund is separate from other sorts of savings. It is specifically designed as a fund to cover essential unexpected expenses, whereas general savings can be used for a range of different expenses or purchases.
Funds for holidays, house downpayments, or general savings would not be considered an emergency fund, and emergency fund finances are designed not to be used for anything but an emergency expense. When building an emergency fund, it is important to be disciplined and not dip into your emergency savings for anything but emergency expenses.
Some examples of emergency expenses could be things like:
- Unplanned medical or dental expenses
- Essential, urgent, and unexpected home repairs
- Boiler breakdown
- Car repairs
- Emergency travel
- Unexpected bills
- Temporary loss of income
- Emergency vet bills
Why Having an Emergency Fund Matters
Building an emergency fund is an important part of good financial management. One of the biggest advantages of having an emergency fund is that it allows you to cover emergency expenses without having to go into debt. If you have an emergency fund that can cover that unexpected storm damage to the roof, then you can avoid having to rely on overdrafts, payday loans, and credit cards to fix the damage.
These back-up savings for a rainy day also help to reduce financial stress; they alleviate anxiety surrounding unexpected expenses and allow you to manage your finances confidently. Having an emergency fund can also help you to stay on top of household bills, as when an unexpected essential payment arises, you don’t have to dip into your everyday funds to pay for it.
For times when money is tight, being prepared with an emergency fund so you can continue to manage your regular bills and finances as you normally would can be a financial lifesaver.
How Much Should You Aim to Save?
How much you aim to save is dependent on your personal situation and finances. Any amount, though, is better than none. Even small amounts can add up quickly.
Start with a realistic first goal
Most experts recommend that having three to six months of living expenses saved in your emergency fund is a good figure to aim for. This amount can cover most unexpected expenses and can also help to keep you afloat financially if you unexpectedly lose your income.
To work out this amount, you would need to combine all your monthly essential expenses, including things such as rent or mortgage payments, household bills, recurring medical bills, insurance, and food bills, and then multiply this by three and by six.
If you are unsure how to complete this calculation, you can use an online emergency fund calculator to help you work out the amount you would need to cover your essential expenses.
It is important not to be daunted by these numbers; it is realistic that an emergency fund will take some time to build up, and any amount you can add each month is a good step.
If saving three to six months’ worth of expenses seems impossible at the moment, start with a smaller goal, save expenses just to cover one week or one month, and keep building from there.
Build gradually over time
Emergency fund savings are designed to build over time, so it is entirely realistic if it takes you some time to build up to the eventual goal of savings of three to six months’ worth of expenses. Even if you can only put aside small amounts, regularly adding small amounts to your emergency fund can grow over time.
Over a year, if each month you just put away small amounts, this creates impressive savings over time.
- £20 every month for one year is £240
- £50 every month for one year is £600
- £100 every month for one year is £1200
- £200 every month for one year is £2400.
How to Save Money When Your Budget Is Already Tight
When the budget is already tight, adding in savings for an emergency fund can feel like a difficult task, but with the right strategies, it is achievable.
1. Understand where your money goes.
The first step to allocating money to build an emergency fund is understanding where your money goes. By tracking your spending and creating a budget, you can see any areas that you may be overspending and reallocate these funds to build your emergency fund.
You can use budgeting apps to track your spending and build a budget. Make sure to separate wants from needs to understand where you can cut back to build your emergency fund.
Some things to look out for where you could reallocate money to an emergency fund could be:
- Cancel automatic subscriptions that you no longer use
- Create a food budget and meal plan to avoid last-minute take-outs
- Sleep on big purchases to avoid impulse buys
- Use free alternatives where you can – Instead of buying books, join the local library, opt for a free weekend activity rather than a paid one, and deposit what you would have spent into your emergency fund
2. Save a little and often.
Even if you can only save very small amounts, this still counts; even a few pounds here or there start to add up. When money is tight, start with small, realistic ways to save for an emergency fund that you can stick to.
Some ways to start building an emergency fund when there is not much money left after payday could be:
- Save just £2 a week. Even this small amount counts
- Round up purchases. That coffee cost 3.50; save the extra 0.50 in your emergency fund. Some banking apps will even do this for you automatically.
- Save your spare change. Collect all your spare change, and at the end of the month, deposit it into your emergency fund.
3. Save unexpected money
Sometimes you may get money from unexpected sources, from a tax refund to a gift; deposit these straight into your emergency fund for an extra boost that doesn’t impact your everyday spending. Some unexpected sources that could boost your emergency fund could be:
- Tax refunds
- Cashback
- Gifts
- Selling unwanted items
Where Should You Keep Your Emergency Fund?
It is important to store your emergency fund in a location that works for you (and no, we don’t mean underneath your mattress!). Your emergency fund should be easily accessible as you may need to access it quickly in an emergency; it should also be separated from everyday funds so you don’t accidentally dip into it for everyday expenses.
Most banks offer easy-access savings accounts that are separate from your main spending account, and these can be a good idea for storing your emergency fund. Savings accounts can be good, as many offer incentives where you can earn interest on the money you save. If opting for this route, though, make sure you choose an instant access account, as you need to be able to access your emergency fund at short notice.
Credit Union savings accounts can also be a good place to store your emergency fund. These accounts can be good for building savings, as some employers let you pay into a credit union account directly from your wages, which can help you to build savings quickly and avoid the temptation of spending money meant for your emergency fund.
The Help to Save Scheme
This scheme is specifically for those who get Working Tax Credit or Universal Credit. If this is you, you might be able to open a Help to Save account. This government funded scheme helps to increase your savings, adding 50p for every £1 saved, and can be a great way for those who get Working Tax Credit or Universal Credit to quickly build an emergency fund.
Common Emergency Fund Mistakes to Watch Out For
There are some common mistakes that people make when they first start out building their emergency fund. By avoiding these pitfalls, you can build a more robust emergency fund that has you covered when you need it.
When starting to build your emergency fund, it is important to avoid:
- Setting unrealistic goals.
It is better to save a small amount regularly than to overspend on your emergency fund and find yourself unable to meet your everyday expenses.
- Using the fund for non-emergencies
An emergency fund is for emergencies only; dipping into this fund for non-emergencies will stop the growth of your emergency fund before it even begins.
- Keeping savings in a current account
If your savings are in your current account, they are too easy to accidentally
access. Keep your emergency fund separate from your everyday spending.
- Giving up after using the fund
Emergencies happen, and the emergency fund is there for that purpose. If you need to use the fund for an emergency, it has done its job, and rebuilding the fund for the next emergency is possible.
Other Ways to Prepare for Financial Emergencies
Building an emergency fund even when money is tight is an important step in creating financial freedom and confidence. Combining emergency fund savings with other strategies to prepare for financial emergencies creates an even stronger ability to manage unexpected costs.
Some other ways to prepare for financial emergencies are:
- Budgeting to better manage money before an emergency
- Checking your benefit entitlement using a Benefit Calculator
- Speaking to creditors early if you are struggling
- Understanding any support offered by your local council
Alongside saving for emergencies, improving your credit building habits may also help strengthen your overall financial position in the future.
In Summary…
Knowing how to build an emergency fund when money is tight is an important aspect of gaining financial confidence and freedom. By staying consistent with savings and starting small, everyone can gradually build their emergency fund. Every small step towards creating this fund is building better financial resilience and creating a better financial future for you and your family.
When money is tight, building an emergency fund is about progress, not perfection. Whether your fund is growing by £5 or £500 each month, it is a financial achievement worth celebrating.
