Setting up an emergency fund

BUDGETING ESSENTIALS

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Introduction 1. What is an emergency fund? 2.How much should you save?

Introduction to 'Setting up an emergency fund'

In this lesson, we'll look at what an emergency fund is, why you might need it, and how to start saving for one.

What you'll learn

  • What an emergency fund is, and why it's good to have one. 
  • How to work out what amount is right for you.

How long it takes

3 minutes

Chapter 1 - What is an emergency fund?

What is an emergency fund?

Chapter 1

How long it takes

1 minute

This is Mary

 

Mary recently completed her monthly budget.

She currently uses all of her unspent income on things such as activities and evenings out.

Now she needs to think about how much she can set aside for an emergency fund.

Why Mary needs an emergency fund

Before Mary's husband died, he used to take care of maintaining the house. He was great at DIY – but Mary really dislikes it. She realises that if anything needs fixing or replacing, she'll need to pay someone to fix this for her, or buy a replacement herself.

For this reason, Mary decides she needs to start saving for an emergency fund. This is an amount of money set aside for unexpected costs.

Introduction - Setting up an emergency fund
Chapter 2 - How much should you save?

How much should you save?

Chapter 2

How long it takes

2 minutes

How much money should be in an emergency fund?

The size of an emergency fund will be different for everyone. As a rule of thumb, this is usually at least 3 months’ worth of your regular bills, spending, and things you can’t live without. These are also known as your outgoings.

For Mary, she's decided that she needs an emergency fund of £1000. She thinks she can do this by saving some money each month over the next year.

What's in Mary's budget?

Let's look at Mary's budget.

Income

Pension £600

 

 

 

 

 

 

Total income £600

Spending

Car £70

Phone £15

Insurance £21

Food £200

Gas £30

Electric £30

Water £33

Total spent £399

Unspent

Total income £600 - Total spent £399 = Total unspent £201

Mary's unspent income

Mary has £201 a month unspent income.  This is what she currently uses for activities like going to the cinema with friends, or meals out with her family. She's thinking about how much of this she can put away, to reach her goal of £1000 by this time next year.

Test your knowledge

Try again - that's not quite right!

If Mary saves £20 each month, she’ll have £240 by this time next year. That’s not quite enough to meet her goal.

Try again

That's right!

If Mary saves £90 each month, she’ll reach her goal of £1000 by this time next year.

It’s just under half her unspent income, so she needs to think if she’ll be able to manage that every month. Plus, if something happens before she reaches her goal, she may need to think about borrowing money to cover this.

Try again - that's not quite right!

Mary can’t save £210 each month, as this is more money than she has available to save.

Try again

Be aware

Often, saving up is a case of deciding what you can and can't afford, and what you are and are not willing to reduce.

Setting up an emergency fund: completed!

You now know what an emergency fund is, why you might need one and how you can work out how much you may need to save.

Chapter 1 - What is an emergency fund?

Want to learn more?

There are many more lessons to help you budget.

Go to Budgeting Essentials

 

Lloyds Bank Academy is committed to providing information in a way that is accessible and useful for our users. This information, however, is not in any way intended to amount to authority or advice on which reliance should be placed. You should seek professional advice as appropriate and required. Any sites, products or services named in this module are just examples of what's available. Lloyds Bank does not endorse the services they provide. The information in this module was last updated on 4th November 2024.

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