Six steps to build an emergency pot

January is often a month of fresh starts, financial resets and, for many of us, reviewing the cost of December’s spending. But new research* from AJ Bell has revealed a worrying truth: many people in the UK are entering the new year without a strong enough financial safety net.

We've found that one in five Brits has less than £1,000 in an emergency fund. At a time of rising living costs and job insecurity, that leaves millions financially vulnerable if the boiler breaks, the car fails its MOT or their income suddenly drops.

Women and young people are being hit hardest

What’s particularly striking is how uneven the nation’s savings habits are. A quarter of women have £1,000 or less saved, compared with just 15% of men. And the gender savings gap appears to be widening; on average men have £1,746 more set aside than women, representing a 19% gap.

Age also plays a huge role. More than a third (37%) of 18–34-year-olds have under £2,000 saved, while at the other end of the scale, 21% of over-55s have £20,000 or more tucked away. It’s natural that older people have had more time to build a buffer, but it does highlight how exposed many younger people really are as they often face higher rents, lower real wages and rising living costs.

Even more revealing is the difference between the average and median savings figures. The average emergency pot sits at £8,245, but the median (what most people actually have) is just £4,500. That means a small group with large savings is pulling the average up, masking how little the majority have.

How much should you aim for?

The Financial Conduct Authority recommends keeping at least three months of take-home pay in easily accessible savings. That may feel like a big ask, especially if you’re starting from scratch, but the key is simply to start.

Once you’ve built a healthy emergency buffer, it can also be worth considering investing for longer-term goals, where your money has the potential to grow more meaningfully than it might in cash. Read more about how sticking to cash is eating away at your long-term financial wealth.

Six practical steps to boost your emergency cash pot

Whether you’re rebuilding your finances or starting your first ever emergency fund, these tips can help you take control:

1. Pay down your debt

The FCA’s latest Financial Lives study showed a rise in buy now, pay later usage, as well as other high-cost credit, like credit cards and personal loans. Take a look at how much interest you’re paying and work out a plan to pay it off. If you can, move it to a cheaper form of debt, and then work out a way to overpay (even by small amounts) to start chipping away.

2. Shop around

One way to save money that could then be funnelled into savings is to cut your outgoings. A good way to do this is to look at any contracts you have and shop around to see if you can get it cheaper. Look at things like mobile phone or TV contracts to start.

3. Work out a budget

Lots of people find they overspend each month, slipping into their overdraft or putting some spending on credit cards. But it’s a good idea to work out why, and where your money is actually being spent. A scan through your bank account will show where your money is going – and potential areas you could cut back on then put the savings into your emergency pot.

4. Pay more into your workplace pension

While lots of people are neglecting their cash savings, they are also overlooking the power of their pension. At least 8% of your salary must go into a workplace scheme under auto-enrolment rules; half from you, 3% of your salary from your employer, and the equivalent of 1% from the government in the form of tax relief. This is just a minimum and employers often pay more if you also increase your contribution. Check to see if your employer offers more generous contribution rates if you also chip in more. This is effectively free money to give your pension a boost. Self-employed and excluded from auto-enrolment? You can still use a Self-invested personal pension (SIPP) or a Lifetime ISA to save for retirement and enjoy top-ups from the government in the form of tax relief and bonuses, respectively.

5. Consolidate pensions

If you’ve had multiple jobs during your working life, it’s easy to build up a range of pensions with different employers. Combining these into a single pot makes sense from a time management perspective and you might also be able to save on costs. Having a single pot means you can have a clear focus on what you’ve got and how you’re going to hit your goals.

6. Don’t hoard cash that could be invested

While one-in-five adults having less than £1,000 in emergency cash savings is worrying, it’s also worth considering those individuals who have too much held in cash. Having some money for emergencies is sensible financial planning, yet hoarding cash that could be generating better returns via investing isn’t a great way to put your hard-earned money to work. A lot of people have time on their side to take higher risks with their money and history suggests that investing in shares can generate a higher return than cash over time.