Your emergency fund

An emergency fund is boring right up until the day you need it. Then it’s the best money you ever saved.

An emergency fund is money set aside for things you can’t predict and can’t avoid: losing your job, a medical bill, an urgent repair, a family emergency.

It’s the foundation for everything else in personal finance. Without one, every surprise pushes you into debt, and debt makes the next surprise even harder.

How much do you need?

The usual target is 3 to 6 months of essential costs. That’s your needs, not your full spending: rent, bills, food, transport and minimum repayments.

Aim towards the higher end if:

• Your income is irregular, or you’re self-employed
• You’re the only earner in your household
• Other people depend on you
• Your job would be hard to replace quickly

If your essential costs are $2,000£1,500€1,600₦250,000$2,000 a month, a 3-month emergency fund is $6,000£4,500€4,800₦750,000$6,000.

Build it in steps

That number can feel huge. So don’t aim for it all at once. Build it in stages:

1. Starter fund: a small amount that covers a typical surprise, like a repair or a bill. This stops small problems becoming debt.
2. One month of essential costs.
3. Three months.
4. Six months, if your situation calls for it.

Each step makes you safer than the last.

My first target was just enough to fix my laptop again. Hitting it felt so good that I kept going.

What counts as an emergency?

Ask three questions: Is it unexpected? Is it necessary? Is it urgent?

• Losing your job: yes, yes, yes. That’s what the fund is for.
• A sale on trainers: no, no, no.
• Your yearly insurance renewal: it’s necessary, but you knew it was coming. That’s a job for a sinking fund, not your emergency fund.

When you do use the fund, that’s fine. That’s what it’s there for. Then make refilling it your next priority.