Investment planning

Emergency Funds and Financial Resilience

12 December 2023

Financial stability is the compass that directs us through life’s uncertain journey, guiding us through unforeseen problems and unexpected detours. The often-overlooked emergency fund is a critical element in establishing this stability, not least because of the blanket of security it provides in the long-term. Combining rigid financial resilience with a carefully planned emergency-savings fund isn’t guaranteed to make you a millionaire, but it will give you the invaluable clarity needed to be level-headed with your money.

Imagine a sudden job loss, a medical emergency, or an unexpected car repair. These are the unexpected curveballs that life can throw at us. These issues, without a financial safety net, can swiftly snowball into crises, producing worry, anxiety, and potentially derailing long-term financial goals. This can lead to people taking out high-interest loans, creating a short-term fix but a long-term problem, essentially worsening their position in an attempt to better it.

This is when having an emergency fund comes into play.

An emergency fund – for those of you that don’t know – is a designated pool of resources set aside to cover unforeseen expenses or periods of reduced income. It serves as a financial safety net, providing peace of mind and security in the face of life’s uncertainties. Recent ONS studies suggest that four in 10 British families have less than £1,500 in savings and investments1 – meaning any unforeseen financial obligations could be detrimental for nearly half of this country’s families.

Protection against the Unexpected

Life is fundamentally unpredictable, and financial security is all about planning for the unexpected. Life may be sunshine and rainbows one day, but a car problem, a household issue or any kind of repair work can throw a spanner in the works at any time. An emergency fund acts as a financial cushion, helping individuals and families to deal with unforeseen needs without incurring high-interest loans or jeopardising long-term investments.

Financial stress can have a negative impact on mental and emotional health. According to a recent ONS survey on financial pressures in the UK, more than a fifth (22%) of adults who reported borrowing more money or using more credit between September 2022 and January 2023 reported a low happiness score1. This is twice the percentage of adults who had not relied more on borrowing or credit. Knowing you have a financial safety net in place can reduce worry and give you a sense of control during difficult times. This emotional resilience is a critical component of total well-being.

Without an emergency fund, individuals may resort to borrowing money or using credit cards to meet urgent expenses. A fifth of UK adults, equating to around 11.5 million people, reported borrowing more money compared with a year ago1. This can lead to a cycle of debt with high-interest payments, making it difficult to break free from a precarious financial situation. An emergency fund acts as a shield against falling into the debt trap.

How can I create an emergency fund?

Begin by assessing your monthly expenses and setting a sensible goal for your emergency fund savings. Many financial experts recommend saving three to six months’ worth of living expenses, while the actual amount depends on personal circumstances and risk tolerance.

Create a second savings account particularly for your emergency fund. This division reduces the temptation to use these cash for non-emergencies and guarantees that the money is readily available when needed.

Building an emergency fund takes time and requires consistent contributions. Consider these donations to be non-negotiable monthly expenses, similar to rent or electricity. Automate transfers to your emergency fund to ensure consistent payments without relying solely on willpower.

If you have high-interest debt, such as credit card amounts, prioritise debt repayment alongside emergency fund building. Striking a balance between these priorities will assist in keeping interest payments from escalating while also preparing for unexpected expenses.

Life circumstances change, and so should your financial goals. Regularly reassess your emergency fund target based on changes in income, expenses, and overall financial health. Adjust your savings goals accordingly to ensure that your emergency fund remains relevant and adequate.

Peace of Mind

Actioning these steps just once isn’t going to make you financially stable overnight – like all forms of resilience, it’s built up over time, trial and error. Resisting the urge to use your emergency fund for non-emergencies requires discipline. Educate yourself about what constitutes a true emergency and differentiate it from discretionary spending. Having a clear understanding of your financial boundaries will strengthen your commitment to preserving your emergency fund.

Building financial resilience is a must in the ever-changing landscape of personal finance. The emergency fund is the foundation of this resilience—an vital resource that gives stability, decreases stress, and protects against life’s uncertainties. Individuals can achieve greater financial stability by prioritising continuous saves, setting realistic goals, and cultivating financial discipline. The peace of mind that comes with a well-funded emergency fund is more than simply a monetary asset; it’s a lifeline that allows people to confront the unknown with confidence and fortitude.

1 How are Financial Pressures Affecting People in Great Britain – The ONS (Feb 2023)

Sign up to our mailing list to get the latest wealth and mortgage and protection insights

Mailing list

What news would you like to hear about?(Required)