Your goals
How to build up an emergency fund
An emergency fund is a cash savings buffer that helps you cover unexpected costs and therefore minimising the need to borrow money.
An emergency fund is a cash savings buffer that helps you cover unexpected costs and therefore minimising the need to borrow money.
Produce a list of costs that you run up every month.
Calculate how much you spend each month.
Make sure you pay off outstanding debts first, then decide how long you want this fund to last because it will govern your investment decision – 3 months or 2 years. This is important because the effect of inflation must be considered. There is no point in saving £1,000 for 2 years on deposit as it will not buy the same amount of emergency cover at the end of the period.
Decide how long a period you would like to have covered by this emergency fund.
Do you want this money to be available immediately? If not then alter your time period.
If the fund is to last 2 years consider how much risk do you want to take. Normally the greater risk, the greater the potential return.
In general, emergency money needs to be:
Instantly available
Generating a return which is more than inflation
Possible ideas
ISA: all ISAs are instant access and can be invested in a wide variety of investments with varying levels of volatility.
Capital risk free: bank accounts.
Low risk of falling prices: certain fixed income bond funds. Access to these is through investment platforms or financial advisers.
Information, not advice. This guide is general information to help you understand your options. It is not personal advice and not a recommendation to buy, sell or hold any investment. If you are unsure what is right for your circumstances, consider taking regulated financial advice. The value of investments and any income received from them can fall as well as rise, and investors may receive back less than they originally invested. Past performance is not a guide to future returns.