How much should you have in an emergency fund?

The short answer: aim for three to six months of essential spending, not three to six months of salary. If rent, bills, food and travel cost you £1,950 a month, that is £5,850 to £11,700. Keep it in an easy-access savings account, separate from your everyday money.

Step 1: add up your essential costs

Count only what you would still have to pay if your income stopped. Leave out holidays, meals out and subscriptions you would cancel. An example:

Step 2: pick your number of months

Why it matters more than people think

• Sick pay: Statutory Sick Pay is £123.25 a week, about £534 a month, unless your employer pays more. See company sick pay.
• Redundancy: statutory redundancy pay needs two years' service and is capped. See redundancy pay explained.
• Universal Credit: the first payment usually arrives about five weeks after you claim, and savings over £6,000 reduce it.
• Big one-off bills: a boiler, car repair or vet bill is far more common than losing a job, and without savings it often goes on a credit card at 20% or more.

Where to keep it

• Easy-access savings or easy-access cash ISA: you can withdraw within a day or two and still earn interest.
• Not in your current account: it is too easy to spend, and it earns little.
• Not in shares or fixed-term bonds: shares can fall just when you need the money, and bonds lock it away.
• Protected: up to £120,000 per person per banking group is covered by the Financial Services Compensation Scheme.

The interest usually stays within the £1,000 Personal Savings Allowance; see tax on savings interest.

Emergency fund or paying off debt?

1. Build a starter buffer of about £1,000.
2. Pay off expensive debt such as credit cards and overdrafts.
3. Build the full fund.
4. Then save or invest for longer-term goals and your pension.

Keep paying your workplace pension throughout: your employer's contribution is too valuable to stop. See should you opt out of your workplace pension?

What counts as an emergency

Deciding this in advance stops the fund slowly turning into a spending account.

Separate pots for bills you know are coming

Many "emergencies" are really irregular bills: the MOT and service, car and home insurance renewals, Christmas, birthdays, school uniform, glasses. Put these in a second pot (some people call it a sinking fund) by adding up the yearly total and dividing by 12. If those costs come to £1,800 a year, setting aside £150 a month means they no longer eat into your emergency money. Most banking apps let you create named pots or spaces for free.

Couples, families and renters

• Couples: base the fund on your joint essentials, but ask how long you could manage on one income. If one of you earns most of the money, aim higher.
• Children: childcare often still has to be paid during a short gap, and nursery deposits are not refunded, so include it in your essentials.
• Renters: a move can need a deposit and the first month's rent before the old deposit comes back. That alone can be two months of rent.
• Homeowners: repairs fall on you. A common rule of thumb is to allow around 1% of the home's value a year for upkeep, separate from the emergency fund.
• Self-employed: keep your tax money in its own account too, so a slow month doesn't tempt you to spend it.

If you have to use it

1. Use the fund before borrowing, even if it feels painful to see the balance fall. That is what it is for.
2. Cut back on non-essentials while you rely on it, so it lasts longer.
3. Check what help you can claim straight away, such as Universal Credit, which takes about five weeks to pay.
4. Once income is back, rebuild it before restarting other saving goals.

How long it takes to build

Saving £200 a month, a £5,850 fund takes about 2.5 years without interest; £400 a month halves that. See how long it takes to save £10,000. If you dip into it, top it back up before saving for anything else.

The essentials list is an example. Use your own figures; costs vary widely by area and household.