How my Emergency Fund works

So one thing you will hear throughout the PF community is making sure you have your emergency fund setup and funded. The amount you need varies and only you really know what that is, but of course less than 3 months of expenses can be considered risky and require further work.

The bigger question is – where do you tuck it away? Put it in a fixed bond or account and you get penalised if you pull it out early. You could have multiple fixed accounts and roll them over each year. You could leave it all in one account and forget about it except in emergency. You could stuff it under the mattress for all I know, although possibly a little risky if there is a fire or burglary!

So I thought I would share how I have structured mine, and the purpose of each part of it. All the funds that go in on a regular basis are via standing order almost as soon as I have been paid – pay yourself first remember. This is not a recommendation or approach for how you should save yours, but to help provide ideas for people to tailor to their fund and approach, or just for you to laugh at me, take your pick!

Part 1: Cash Flow Fund (CFF)

So this is my relatively easy cash at hand part of the fund, the first line of defense. The account is linked to my current account so that I can transfer money instantly via mobile app or internet or telephone. I don’t consider this particularly “protected” – it is there to help smooth out the ride. In my monthly updates on expenses you will see some months (e.g. November, December) I had a declared savings rate of 0% or -111%. Whilst this is true, I dipped into (aka emptied) my CFF – this meant the direct debits to my pension and my other half’s ISA (and from this year the Go T’ Pub ISA) all went out as usual – in effect meaning I am transferring my emergency fund into long term funds.

I like this approach as it means I am always adding to my investments no matter what happens and gives me some flexibility.

Part 2: The Rainy Day Fund (RDF)

So I guess this is what you would class as the main emergency fund. It is setup with a building society that I require a separate login to view, can’t access on my phone and have no card for. Generally, I forget about this fund wherever possible – money goes in every month to it (I am thinking of upping the amount slightly) and it ticks up slowly but steadily. I have ducked in and out of it, and I am guilty of saying that I would also dip into for holidays or other big purchases. Please remember folks, holidays are NOT emergencies (although I could put up a damn good argument for it I am sure!). If this were all I had in cash or cash equivalent then I wouldn’t use it for that. This was used to balance out the huge negative savings rate I had in November and towards my tax bill – so now it needs to be repaired. I am too lazy to tart around for better rates, I go for simple, single place and not worry about it. If I had a larger amount of cash then maybe I would (for example when I get close to FIRE and want a year or two in cash, then I will start to think about it!

Part 3: Serious Trouble Fund (STF)

This part of the emergency cash is held in Premium Bonds and is there in case of dire emergency. Not used for holidays, some random home improvement (e.g. carpets or whatever), but out and out emergency. Why Premium Bonds? Any winnings are tax free (and get reinvested in more PBs) – given my tax rate this makes them worth a lot more than regular savings as the equivalent taxed rate would need to be a lot higher to offset the tax. So far I have never had to dip into these savings for over a decade, but it is comforting to know that I have it there “in case”. Should the worst happen and I need it, it is there for me.

Part 4: Last Chance Saloon (LCS)

The LCS is my last Cash Isa. Over the years as the STF grew I transferred more of my cash ISAs into stocks and shares ISAs. As it stands now I have one more cash ISA left which, as part of the Go T’ Pub approach, I will be transferring 50% of it into an Investment Trust. I’ve had these funds in a cash ISA for about 15 years and have never touched it hence I am splitting it between cash and stocks to avoid the money losing its value. Over time, and depending on performance, I may end up transferring the remainder into the Investment Trust as well, but who knows. If I have never needed it for 15 years despite some serious challenges, am I holding too much cash? Who know’s. For now I am happy to be a little different and start reducing this.

So there you have it – a reasonable assortment of places where I keep my funds and how I utilise them. How do you manage your emergency fund?


Author: fireinlondon

Fighting the high cost of living in London

9 thoughts on “How my Emergency Fund works”

  1. Thanks for sharing this, FiL – interesting to see your different ‘pots’ and your reasons for having them.

    My Emergency Fund is split across high interest paying current accounts and premium bonds. It’s quite a bit of cash (for me!) and whilst I’d love to be able to invest it, I can’t really consider that until my job situation improves.

    I also have the equivalent of your Rainy Day fund, which I see as my ‘Holiday Fund’ – as you’ve guessed, the funds here go towards my holidays, but also to pay for stuff like festival tickets, birthday gifts etc, depending on how much is in it (not a lot at the moment!).

    Neither of the above are part of my Future Fund as they’re to be spent imminently.

    If I were in serious trouble, I would probably end up cashing in my premium bonds and then if worst came to the worst, I would get at my small cash ISA and then ultimately sell bits of my S&S ISAs.

    Here’s hoping I’ll never need the cash that badly!


    1. Hi Weenie,

      Thanks for popping by! Glad you found it interesting, I thought it was worth sharing as I don’t see that many articles on *how* people set up their emergency funds (or at least not that I have seen).

      Under your current situation I can’t blame you for having more cash than you may normally, that is just common sense! I am reducing my exposure simply as I have never gone into the PBs or cash ISA (granted I went up to a fairly large overdraft but… it was short term and not worth transferring around).
      Sounds like you are on the same page as me with the premium bonds and cash ISA is the last resort.

      I don’t include any of my cash holdings in my retirement planning, it is a safety blanket 🙂

      Fingers crossed you won’t need to get at it – you are clued up and sensible enough so far to plan carefully, so it will come, however knowing it is there for an emergency does take the stress off!

      Liked by 1 person

  2. I like this way of thinking about things. I considered the hassle and inconvenience of using notice or accounts that apply penalties if you take the money out and decided that was exactly where I should be putting my money for proper emergencies. It’s a power-up to my self control! I mostly use regular savings accounts; it means I need to open new accounts every year, but the interest is meaningful and when you have enough they take a decent chunk of my salary away from my day to day bank account. I can withdraw from them instantly, but I lose all the interest.

    I’m considering setting up a separate account for cash flow. At the moment I just use the balance in my current account. It made sense when the Santander 123 account paid more interest. I think the convenience of not having to transfer money if an opportunity or big spend comes up unexpectedly is worth it.

    Liked by 1 person

    1. Hi Playing with Fire,

      Thanks, glad you like the thinking! For proper emergencies then I don’t see a problem with moving things around, I am just too lazy to move it around, hence the Cash ISA (being experimented on with the Go T’ Pub ISA), and premium bonds for tax reasons.

      Given the cuts in Santander 123 rates, and from my experience, I highly recommend transfering funds out as early as possible after payday! It makes me think more carefully on purchases, but regardless of what comes up it is very easy to put it on the credit card, take the rewards, and transfer the money. The CFF is linked to my current account so I can transfer from my mobile and have the money instantly there, so it is worth it!



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