Sizing an emergency fund on the bills that keep arriving, not on salary, and counting the months it takes to fill.
Size an emergency fund on essential monthly costs, not on income: three to six months of the bills that keep arriving if pay stops. For a household whose essentials come to £1,860 a month, that is £5,580 for three months and £11,160 for six. Saving £620 a month at an illustrative 4 per cent, the first takes 9 months to build and the second 18.
Worked in full in Personal Finance for Beginners by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most advice stops at "three to six months of expenses" and leaves two questions open: which expenses, and how long it will take. Both have a number.
The fund exists for the month in which income stops or a large bill lands. So the base is the cost of a stripped-down month, not your normal spending and certainly not your salary. List what would still arrive with no restaurant, no subscriptions and no shopping.
| Essential | Per month |
|---|---|
| Rent | £950 |
| Council tax | £140 |
| Energy and water | £130 |
| Groceries | £300 |
| Transport | £140 |
| Insurance and phone | £70 |
| Minimum debt payments | £130 |
| Essential costs | £1,860 |
One refinement is worth making. If the emergency is losing the job, part of the transport line stops too. Taking out £90 of commuting leaves a lean month of £1,770. That is the true floor; £1,860 is the prudent base because the fund also has to cover a boiler or a car repair while you are still working.
Target = essential monthly costs × months of cover.
£1,860 × 3 = £5,580. £1,860 × 4 = £7,440. £1,860 × 6 = £11,160.
In a spreadsheet with the essentials in B1 and the months in B2: =B1*B2.
The number of months is a judgement about how long income could take to come back and how lumpy your costs are. As a rough frame:
| Situation | Months | Target | Lean target |
|---|---|---|---|
| Two stable incomes, renting | 3 | £5,580 | £5,310 |
| One income, or a home or car that can break | 4 | £7,440 | £7,080 |
| Self-employed, commission-based or a specialised job | 6 | £11,160 | £10,620 |
The same household saves £620 a month (the 20 per cent of a £3,100 take-home that a 50/30/20 budget sets aside) into an easy-access account paying an illustrative 4 per cent a year, which is 0.3333 per cent a month. Each month the balance earns interest and the new £620 goes in.
Balance at the end of month n = balance at n−1 × (1 + 0.04 ÷ 12) + 620.
Count the months until the balance passes the target. In Excel the closed form is =NPER(0.04/12, -620, 0, 5580), rounded up.
| Target | Amount | Months | Balance reached | Interest earned |
|---|---|---|---|---|
| Starter fund | £1,000 | 2 | £1,242.07 | £2.07 |
| Three months | £5,580 | 9 | £5,654.98 | £74.98 |
| Four months | £7,440 | 12 | £7,577.93 | £137.93 |
| Six months | £11,160 | 18 | £11,481.89 | £321.89 |
Interest barely matters while the fund is being built: £321.89 over eighteen months against £11,160 of target. The build time is set almost entirely by the monthly amount. Shopping for the best savings rate is worth doing once the fund is full, when a year's interest on £11,160 at 4 per cent is £446.40; it is not what gets the fund built.
| Saved per month | Months to three months' cover | Months to six months' cover |
|---|---|---|
| £200 | 27 | 52 |
| £400 | 14 | 27 |
| £620 | 9 | 18 |
| £900 | 7 | 13 |
At £200 a month a six-month fund is more than four years away, which is the point at which a full fund stops being a realistic first goal. That is why a starter fund comes first: £1,000 at £620 a month is done in 2 months and covers most single surprises, the repair or the bill that would otherwise go on a card.
If there is expensive debt, the order matters. Money sitting at 4 per cent while a card charges far more has a cost, and the companion workbook for this book prices exactly that trade-off: a starter fund held while paying debt down costs a few hundred pounds of extra interest, which is the premium for not having the next surprise land on the most expensive card. The arithmetic of that card is in what a minimum payment actually does.
Three months of take-home pay is £9,300, not £5,580. Six months is £18,600, not £11,160: an overshoot of £7,440, which at £620 a month stretches the build from 18 months to 29, another 11 months of saving that the fund did not need. Sizing on income feels conservative, but the fund does not have to replace pay. It has to replace the bills.
The opposite mistake is measuring cover in pounds and not in months. A fund of £5,000 sounds substantial. Divided by £1,860 it is 2.7 months of essentials; divided by take-home pay, 1.6 months. Restate the balance as months every time you check it, because months are what the fund buys.
Total your essential monthly costs, multiply by the months that fit your situation, and divide the gap by what you can save each month. That gives the date the fund will be full. Build the starter first, keep it in an account you can reach the same day, and resize it when rent or the household changes.
The printable pages in the free companion files for this book include the starter emergency fund priced and the procedure for the day the emergency arrives. Every figure here is illustrative; this is education, not financial advice.
On essential expenses. The fund replaces bills, not pay. For a household taking home £3,100 with £1,860 of essential monthly costs, six months of expenses is £11,160, while six months of income would be £18,600. The extra £7,440 would stretch the build from 18 months to 29 at £620 a month and protect nothing the bills need.
Three months suits two stable incomes and predictable costs; six suits a single income, self-employment or a job that is slow to replace. On essential costs of £1,860 a month that is £5,580 against £11,160. Four months, £7,440, is a reasonable middle for one income with a car or home that can need repairs.
Divide the target by what you save each month and add a little for interest. At £620 a month and an illustrative 4 per cent, £5,580 takes 9 months and £11,160 takes 18. At £200 a month the six-month fund takes 52 months, so a £1,000 starter fund first is the realistic goal.
This article is one calculation from Personal Finance for Beginners. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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