How to start saving an emergency fund

Saving is a brilliant habit to get in to. The very first thing you should look at when starting to save is building an emergency fund.

This fund aims to give you a buffer should you lose your job, or be faced with an unexpected expense that would otherwise cripple your finances.

It will also give you some peace of mind, not to mention a feeling of some control in a situation where you might otherwise find yourself needing to borrow money.

How much you will need to stash in a savings account for your emergency fund will depend on your personal situation, but you would ideally want enough to cover your bills for a few months. It's generally recommended that you have around 3-4 months' worth of income saved in an emergency fund, just in case.

Sometimes you might even have an inkling of a forthcoming emergency such as a hunch that your car might not make it through the next MOT, so you may want to up the amount you save in preparation.

Look also at insurances you have, such as income protection. These can provide a cost-effective way of making sure you can pay at least some of your outgoings in the event you are unable to work or are made redundant.

Now you have an idea of the figure you need to save, it's time to look at how you can achieve it – and this involves putting your monthly budget under the microscope.

• Tot up everything you have coming in (typically your earnings).
• Then make a note of everything you have going out, known as your outgoings. This should include all essential bills, food, the money you spend on socialising, and any additional expenditure.
• Are there places you can cut back or save money?
• Do you have magazine subscriptions you never read?
• A gym membership you never use?
• Can you get a better price for your insurances?
• Can you get a more competitive energy tariff?
• Are you getting the best value from your mobile phone contract?

Once you've done all this you should be able to identify the amount you can comfortably put away each month into a savings account.

The amount you decide to save shouldn't be such a challenge that you find it a struggle getting through the month, but at the same time, to achieve your goal you are going to need to save a reasonable amount.

Obviously you're not going to be able to save your emergency fund overnight. Be prepared for it to take several months, even a couple of years, until you've got your fund at a level you're happy with.

Don't be put off by the length of time it takes to save – keep thinking about what you're saving for, and how this money would get you out of a hole if you were ever to need it.

As you're going to be saving regularly, and potentially need to get at your money quickly, you'll need a savings account that lets you:

• Pay in extra money whenever you want
• Make withdrawals with little or no notice

In addition you may want to look at savings accounts that let you:

• Manage them online or over the phone
• Offer a cash card

To start off, you may find that your normal bank account will suffice, particularly as some pay higher interest than the best savings rates on offer (some high interest current accounts offer in-credit interest rates of up to 5%).

However, the downside is that your emergency fund is intermingled with your everyday funds, which can cause confusion – not to mention the temptation to spend!

For an emergency fund, you will probably find that one of these types of savings accounts would be most suitable:

• Easy access savings accounts – these allow instant or no notice access to your funds. No notice access could mean you will have to wait a few days while the money is transferred to your bank account. However, check the terms as some only offer a certain number of penalty-free withdrawals each year. Make sure to watch out for introductory bonuses as well, and be prepared to swap accounts when these end.
• Notice savings accounts – these accounts let you access your money after giving a certain amount of notice. This will vary depending on the account you choose, with higher interest rates payable when you can give a longer notice period. Sometimes you can get your money sooner, although this usually means forfeiting an amount of interest equivalent to the notice period. Remember that if an emergency were to hit, you probably wouldn’t want to give too much notice, so choose your term accordingly.
• Regular savings accounts – these can pay high rates of interest, but will normally require you to commit to making a set number of payments. There will usually be other conditions such as a minimum/maximum amount you can pay in monthly, and some come with penalties if you make a withdrawal. But this all serves to make regular savings accounts great for undisciplined savers, as they could be a great way to get into the habit – and if you can find one that allows withdrawals, you needn’t worry about not being able to access your funds in an emergency.

1. Set up a regular standing order from your current account to your savings account. This will ensure your savings make it to the emergency fund each month.
2. Review how much you're saving at regular intervals. If you're finding it a struggle to save the amount you committed to, you're far more likely to succeed by reducing the contribution a little.
3. Keep motivated. Maybe you could chart your progress or even reward yourself with dinner out once you get to a key milestone, such as saving your first £1,000.
4. If you manage to save some money (such as by getting a lower premium when you renew your car insurance) consider putting this extra cash into your emergency fund each month, rather than letting your monthly finances absorb it.
5. By the same token, if you have a pay rise coming up, consider diverting this money into your savings before you become accustomed to it. You won't miss what you've never had, but you'll get to your savings goal all the quicker!