Many Brits lack emergency funds. Here's how to build yours

By Emma Lunn

An emergency fund can be vital if you have a medical emergency, have serious car trouble, lose your job -- or experience all of those things simultaneously. Yet research from internet bank First Direct has found that 28% of households have less than £250 in accessible savings.

No safety net
The survey of more than 1,000 UK households found that more than a fifth (21%) have no savings at all to fall back on, and 7% have less than £250 set aside as a financial safety net. With current household spending averaging £1,536 a month, these savings would last just five days.

Households caught without an emergency fund might find themselves having to borrow money and go into debt if the worst happens. First Direct found that 32% of people would be unable to cover their rent or mortgage at all if they were to unexpectedly lose their main source of income. What's especially troubling is that 11% of those surveyed said they would use a personal loan or credit card to help pay for necessities. emergency-savings

Bruno Genovese, head of savings at First Direct, recommends saving three months' salary.

"By putting away small amounts each month, Britons can help themselves build up an emergency savings pot as provision for any eventuality without having to rely on a solution that will get them further into debt," said Genovese in a First Direct news release.

How to build your emergency fund
Patrick Connolly, head of communications for financial advice firm AWD Chase de Vere, also recommends setting aside enough to cover a few months of your usual expenditure. If that isn't possible, it is better to save something than nothing at all. Fortunately, building your emergency fund should be relatively painless.

The easiest way to save, Connolly says, is to set up a direct debit from your bank account and to have the same amount automatically transferred into a savings account every month.  Individual Savings Accounts (ISAs) are the best bet, according to Connolly, because the interest they earn will be tax free.

"You also need to be disciplined to ensure that you don't dip into your savings account for ad-hoc expenses," Connolly says. "Because if you do, then your money may no longer be there when you need it."

Having trouble scraping together enough money to set aside? To get your emergency fund jump-started, set a realistic weekly budget and stick to it. This will help you to see where your salary goes -- and where you can cut spending. Make sure you are on the cheapest possible energy, TV and mobile phone deals. Once you switch to a cheaper plan, put that "extra" money into your emergency fund.

Also look at where you can make day-to-day savings -- just forgoing a daily takeaway coffee could save you about £20 a week or £100 a month. Cancelling a gym membership could save you about £50 a month, while cycling instead of driving to work will save you money on petrol. By cutting out small things you don't really need, you'll be able to save money for the big things you do need in an emergency.

Once you have got your emergency fund underway, shop around for a competitive interest rate to make the fund grow as quickly as possible.

See related: Blogger Q&A: The Diary of a Frugal Family; UK personal finance bloggers share their money mantras

Published: 7 March 2012