Shock bills: How much do you need to save in an emergency fund?

Life doesn’t always go according to plan, and unforeseen expenses can hit anyone at any time.

Of course, if you’re rolling in money, shock payments aren’t a problem. But as that’s not the case for the majority of people, if the car or the washing machine breaks down, or you get a speeding fine, you have to find the money from somewhere. And that’s when you need an emergency fund.

A new survey by the banking app thinkmoney has found the average Brit has to fork out for at least two shock bills a year, spending an average annual total of £776 on these charges.

The car breaking down (44%) was the most common unforeseen expense, with broken washing machines (37%) coming second and dental work (28%) third.

Needing an emergency plumber or electrician came next (26%), alongside boiler breakdowns (26%) and increasingly expensive vets’ bills (25%). Other common financial hits were smashed phone screens (21%), parking fines (20%) and roof leaks (18%).

Nearly half (42%) of the 2,000 British adults polled dipped in to savings to meet unforeseen expenses, while 20% put it on a credit card, and one in 10 (10%) borrowed cash from friends and family.

Just 6% used their overdraft, while 3% either took out a loan, found extra work or used a buy now pay later scheme.

“With the cost of living continuing to bite into budgets, a financial setback is the last thing you need and, as a result, it’s easy to bury your head in the sand and hope it won’t happen to you,” says Vix Leyton, a consumer expert at thinkmoney.

“Our data shows the odds aren’t in your favour, so your best route is to plan for the financially unplannable.”

Half (48%) of those polled felt they were just one unexpected financial hit away from disaster, and just over a third (34%) said they’d been forced into debt by a sudden expense. And while one in 10 said they were brought to tears when a shock bill landed, some (16%) said they regretted not setting aside money for unforeseen expenses.

But how much should you save if you have the foresight to create an emergency fund? Leyton explains that while there’s plenty of advice that suggests putting away half your annual salary is a good idea, the reality is you probably don’t need that much.

“The classic advice to save three to six month’s salary for unplanned setbacks is a great idea in theory, but in the real world it’s out of reach for a lot of families right now,” she says.

“The risk is that it becomes so intimidating that people give up before they’ve even started, because what’s £50 going to do against six month’s of bills?”

She advises building a smaller safety pot for expenses like car, appliance and house repairs, and unexpected dental and vet bills, etc, pointing out: “A smaller safety pot is not only more achievable, it’s also the first step towards real financial resilience.”

Leyton points out that round-up pots or top-up accounts that skim the change from transactions can make saving invisible and painless, and says savers can layer emergency money, with a mini-buffer for quick fixes like replacing a tyre, and a longer-term pot for bigger financial setbacks like redundancy or health issues.

And she also suggests making sure car breakdown cover and house insurance covers what you think it does, warning: “While it’s tempting to raise your insurance excess to lower annual payments, you should only do it if you can genuinely afford the excess in an emergency, otherwise the policy is effectively useless.

“Home insurance is a classic ‘set and forget’ until it’s suddenly the most important document in your life.”

Check what your policy covers: is accidental damage included? Are you covered if your pipes burst, or if your cat knocks the TV off the stand? Could it cover your lost phone or stolen bike? “Knowing in advance can shape how much extra you might want to keep aside,” says Leyton.

Hayden Fisher, a chartered financial planner and regional manager at Shackleton Advisers, says saving three to six month’s of known household outgoings, like monthly mortgage or rent payments, utility bills, council tax, etc, is sometimes suggested as a good rule of thumb for an emergency fund.

However, he points out this isn’t right for everyone, although it can be used as a baseline figure while taking other financial matters into consideration.

“Six month’s worth of expenses to be held in a cash-based account is a good starting point, potentially looking to hold more if a person’s income isn’t predictable,” he says.

On top of that, Fisher suggests it’s sensible to think about any capital expenses, such as holidays or buying a car, which are likely to crop up within the next three to five years but wouldn’t be met by income. Any money put aside for such expenses should be held in more short-term savings, he advises.

And that’s not all.

“There are scenarios where you may wish to hold even more as an emergency fund, perhaps in retirement if you’re wholly reliant on investment income, for example,” he says.

Retirees might work out an appropriate level of cash holdings based on the six month’s expenses rule, but then may add a little more “as a comfort blanket to ensure they can sleep well at night.”

As well as unexpected property and vehicle repairs and ad-hoc expenses, Fisher says an emergency fund may also be a lifeline if there’s a sudden loss of household income, or even to pay for a private medical procedure.

“I’d suggest that these funds be held in a high-interest savings account or a Cash ISA, where the funds can  be accessed at short notice, without penalty,” he advises.