How much cash do I need for emergencies?

Having money saved for a rainy day can be key to making you feel financially secure. But how much savings you should hold, versus when you should start investing, can be difficult to balance.

Generally, advisers recommend holding between three and six months of expenses in cash savings. Many people refer to this pot as an emergency fund. This is not money for a summer holiday or a house renovation but rather cash for unexpected events such as a medical emergency, a broken boiler or losing your job.

A survey by the Financial Conduct Authority this May found that 10% of people have no cash savings, and another 21% have less than £1,000 they could draw on in case of emergency.

If you are in this situation, there’s no need to panic. But it may be a good opportunity to begin building your own cash savings pot before putting money into the markets via investing.

How do I build up my cash savings?

You can start creating an emergency fund by putting a little money aside each month. This may mean cutting back on a few things in the short term, but it will provide you with much more security down the line and remove some of the pressure if something does go wrong.

Think about which TV or magazine subscriptions you really need, or how much you’re spending on coffees or pints in the pub. Cutting back on some of these can free up money for the emergency pot. If you were planning any kind of larger project, it may be smart to hold off on any extra costs until you are able to build up your emergency fund.

In some cases, if you are investing your money already but don’t have an emergency fund, you may want to pause your investments to rebuild your savings and then restart your investing journey once that’s done.

When putting money aside for savings, it can be helpful to transfer the cash into a separate pot on pay day. That will help to avoid the temptation of spending the cash before you’ve stashed it away.

What if I must use my emergency fund?

If you experience an emergency and have no choice but to withdraw money from the savings pot, you can first congratulate yourself for having the foresight to create one in the first place. It has served its purpose and hopefully tides you over until you are able to get back on track.

Spending the emergency money might make you feel anxious until you’ve topped it back up. You might need to cut back on your spending during this period but remember that you’ve already built an emergency pot once, so you can do it again.

This is an ideal time to assess if the previous emergency pot was adequate. Did you feel that you had enough saved last time? Would you want more in your emergency fund in the future, or did you feel comfortable with what you had? These questions can help you make more informed and personal decisions about your finances.

When looking to rebuild an emergency pot, some people may be tempted by higher risk investments that can help them reach the amount they need quickly. This strategy can backfire and potentially leave you with less money that you started with. It’s important to stick to your normal risk appetite, even if it takes a while to rebuild the emergency pot.