Your emergency fund may need to increase this year. Here’s why

An “emergency fund” describes a pot of savings designed to keep your household going if you lost your income for a short period.

Typically, financial planners recommend that you have three to six months’ essential expenses saved up in case of an emergency cost that you didn’t expect. “Essential expenses” include:

• Mortgage repayments
• Energy bills
• Car finance payments
• School fees
• Food and drink costs
• Essential travel expenses.

If you’ve already established an emergency fund and have left it untouched, you may feel safe in the knowledge that your essentials would be covered for a few months if needed.

What you may not have realised, though, is the rising cost of living in recent years has pushed up the average amount you may spend on a few months’ essential expenses.

Keep reading to learn how much some household expenses have risen by, and what this could mean for you when building an emergency fund suitable for your lifestyle.

The cost of 3 months’ essentials has gone up by more than £1,000 in 2 years

According to a study published by MoneyAge, the cost of three months’ expenses has gone up by £1,028 on average.

The research reveals that in the two years to January 2024:

• Inflation has pushed up three months’ worth of expenses to an average of £6,234.
• The average household spent £2,081 on essentials every month.
• The top 20% of earners spent an average of £3,352 on essentials each month.

With all this in mind, if you put away your emergency fund several years ago, you may find that it no longer covers your essentials for the time period you need.

Now, let’s take a closer look at some specific essentials that have been particularly affected by rising costs.

3 essential expenses that have risen during the cost of living crisis

1. Mortgage repayments

If you took out a five-year fixed-rate mortgage agreement in 2019, your deal will be due for renewal this year.

In 2019, the Bank of England (BoE) set the base rate at 0.75%, before dropping it to just 0.1% during the Covid-19 pandemic.

As of May 2024, it stands at 5.25%, after the BoE began to gradually increase it from its historic lows in 2021 – and all this has had an impact on the mortgage rates being offered to borrowers.

According to Moneyfacts, the average five-year fixed rate offered by lenders in March 2019 was 2.89%. In May 2024, Moneyfacts says the lowest rate available on a similar mortgage deal would be 4.48%.

So, if you’ve had to remortgage since interest rates began rising in 2021, or if you’ve purchased a new home in this time and taken out a new deal, it’s likely that your monthly repayments have increased.

2. Food

The Office for National Statistics (ONS) reports that in the year to March 2024, UK inflation rose by 3.2%, down from 10.1% in March 2023.

Of course, this is welcome news – while inflation is still going up, it’s rising much more slowly than it did throughout 2022 and 2023.

However, it is important to remember that inflation is measured by looking at the cost of 750 goods and services around the UK, not just essentials like food.

The ONS says that in February 2024, food inflation stood at 5%, falling to 4% in March. So, food prices are still rising by 4% year-on-year.

If you had to fund three months’ worth of food shopping for your family using your savings, food inflation could dampen the spending power of your existing emergency fund.

3. Car insurance

Car insurance is a legal requirement in the UK, and sadly, costs have gone up substantially in the last year or so.

The Guardian reports that in the year to January 2024, annual car insurance premiums had risen by an average of 58%, bringing the average cost to £995.

Under a system that usually sees premiums decrease year-on-year if a driver has made no claims, 75% of policyholders reported paying more in 2023 than they had the previous year. Some prices had gone up by as much as 90%.

As such, it may help to factor higher car insurance costs into your emergency fund.

Seeing as there is no opt-out on this form of cover (apart from selling your car altogether), it’s important to be able to cover this cost using your emergency fund.

Get in touch to learn how working with us can help improve your financial stability

Your emergency fund is just one element of your financial plan that might have been affected by rising costs.

To take a comprehensive view of your money over the long term, email enquiries@prosserknowles.co.uk or request a callback from one of our advisers.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Think carefully before securing other debts against your home.