Money: How much should you be saving into an emergency fund?

Laura Whateley- Money- A user's guide

When costs are soaring, it is obviously tough to find enough to save, too, says money expert and author of Sunday Times Bestseller Money: A User’s Guide Laura Whateley. But here are some suggestions to get started…

Words: Laura Whateley

As a freelancer I know only too well the challenge of trying to budget and save when income is bumpy, invoices are late, and there’s no one else to set up a pension for you, offer you sick pay, or sort out your tax.

But if the uncertainty of the past couple of years has taught us anything, it’s that creating a buffer against yet more unprecedented events and income shocks has become essential.

The debt charity, Stepchange, says as many as half the people they are seeing at the moment wouldn’t need any help if they had started out with an emergency cash fund to draw on. It is something unexpected – an enormous energy bill, a washing machine gone wrong, a relationship breakdown – that has forced them to borrow money and become trapped in a cycle of financial difficulty.

When costs are soaring, it is obviously tough to find enough to save, too, but here are some suggestions to get started…

How much should you be saving into an emergency fund?

There are traditional personal finance rules that some find helpful, others, less so.

Most financial advisers repeat the same mantra: save three to six months worth of outgoings into an emergency fund, freelancers up to nine months.

I think this can feel an exceptionally daunting sum, though, and when something is daunting it is all too easy to procrastinate and never get round to saving anything at all.

There are some percentage templates, for example 50:30:20, 50% of your income on essentials (housing, bills), 30% on discretionary spending, and 20% on saving (including short and long term), but this is less easy to make work these days, with so many spending more than half their income on rent or bills.

Stepchange suggests £1,000 cash to avoid falling into debt.

Only you really understand your own financial resilience. How long can you keep going without income? What would you do if your work dried up? Based on your own personality and appetite for risk, how do you feel with only a small amount of savings?

Use these questions as your starting point.

Keep your finances clear and separate

If you’ve got a regular salary it’s easy to know exactly how much is coming in each week or month. But you probably don’t, so consider setting yourself a rough one anyway.

The trick is to have at least two bank accounts, one where all your earnings come in, and a second where you move your “salary” at regular intervals as if you were being paid by an employer.

Keep your business finances and personal finances separate so you’re not tempted to spend more than you can afford to.

Do the same with savings. Once you’ve decided what you need to save, pay it to yourself first, out of your “salary”. But where?

Consider short, medium and long term

Emergency savings, by their nature, need to be accessible in a hurry so kept in cash in an easy-access account. Check out a comparison site like to compare the best interest rates, they are starting to become (a bit) more generous. Regular savings accounts tend to have the best rates.

The same applies for your tax bill if you pay via self-assessment. App banks are getting better at helping freelancers work out what tax they will owe.

I use Monzo’s business account which has a handy function where a set percentage amount (you decide how much) is moved instantly into a separate pot when payment for work comes in.

If you’re saving for the more medium term, three to five years or more, consider investing in a stocks and shares Isa. History shows that investing in the stock market tends to produce better returns than cash. Don’t be daunted by investing, there are so many guides to help you understand the basics online now, I love the resources from Vestpod.

Don’t forget about pensions

The benefit of saving for your longer-term future in a pension is that you are rewarded with a very generous tax break from the government. For every £1 you save as a basic-rate taxpayer, it only costs you 80p, and as a higher-rate taxpayer, just 60p.

The downside is, you can’t access the money until you’re 55.

There are lots of pension providers that target self-employed people, particularly, PensionBee, Penfold, and Nest, that all let you open your own pension, pay in via direct debit, or one off payments, and stop and start when needed.

If you are under 40, an alternative could be a Lifetime Isa. This account allows you to save up to £4,000 a year, and in return get a top up of £1,000 a year from the government if you don’t withdraw the money until you’re 60. The bonus is the same as the tax break on a pension if you’re a basic rate taxpayer (but not as generous if you are higher rate). But unlike a pension, it’s more flexible: you can access the cash any time if you need to, though you’ll pay a penalty of 25% to do so.

Don’t waste money on debt interest if you can avoid it

One of the most efficient ways to save money is to pay off debt. I don’t include student loans here, as they work differently (more like a tax) or mortgage (where you might not feel the benefits of overpaying for years).

But if you’ve got a credit card with a high interest rate and you’re only clearing minimum payments, it’ll be costing you more than you realise. Try and get as much of your debt onto 0% interest, or clear them in full each month.

Automate your savings habit

There is a growing movement towards trying to get employers to offer automatic payroll emergency savings. A recent trial by Nest, that introduced pension auto-enrolment, has been amazingly successful. When employees had to opt in to have a small amount of savings taken from their pay packet and put into an emergency fund, the take up was 1%. When they had to opt out or this would happen automatically, only half did – 53% started saving more.

Remember what I said about procrastination?

Apply a similar psychology to your freelance savings. The app Chip can do this for you, using AI to scan your account to see how much you can afford to save and moving small sums into a savings pot without you really noticing. Or use a rounding up app, Starling Bank offers this, where you save “spare change” whenever you spend using your debit card.

Or as I do set up weekly direct debits, I have one for my bills, one for my joint account spending, one for holidays and Christmas. It’s all about “set and forget”.

Money: A User’s Guide by Laura Whateley

Author: Contributing writer