Are your emergency savings keeping up with household spending?

Life is getting more expensive. Inflation may have slowed from the horrendous highs of the post-pandemic period, but we’re still feeling the squeeze. The cost of keeping a roof over our heads rose significantly, with rent and mortgages both up 14%, as rents climbed and homeowners continued to move off cheaper fixed rate mortgages. 

The pain of rising prices isn’t being felt evenly. Richer households have the wiggle room in their budget to spend more as prices rise. Their weekly spending during the year rose twice as fast as it did for the poorest fifth of households (10% compared to 5%), who were forced to cut back to deal with rising costs. The lower households are on the income spectrum, the bigger the proportion of their income they spend on housing, fuel and power, so the tougher those cuts become. 

The savings shortfall 

With prices rising, households are preoccupied with making ends meet. When AJ Bell surveyed people on their financial priorities in March this year, one in four people (24%) said their priority was managing day-to-day expenses, rising to 30% among Generation X.

However, as the cost of the essentials rises, it also means we need to think about our emergency savings. Typically, while we’re working, we need enough emergency savings to cover three to six months’ worth of essential spending – rising to one to three years’ worth in retirement. Rising prices automatically means we need more put aside for a rainy day. 

What people spend, and what they consider essential will vary dramatically, so averages will only give a snapshot. However, drawing estimates from broad categories of essentials from these figures can give a broad indication of how most emergency savings funds need to rise.  

The average household spent £676.60 in total a week in the 2024/5 financial year with £641 of that (£2,778 a month) going on things like mortgages, household bills, insurances, tax, communications and transport – up from £594 a week and £2,572 a month back in 2023/24. If we assume that cost-cutting within these categories can trim 20% off the cost, that’s £2,222 a month – up from £2,058 a year earlier. 

Someone with these costs would now need an emergency fund of between £6,666 and £13,332 – up from between £6,174 and £12,348. It means you might need another £984 in savings. Clearly these are estimates, so it’s worth doing the sums for your own spending, but it’s a reminder of the fact your emergency savings may not have kept pace with your spending. 

Don’t be put off from making a start

At a time of rising prices, it’s not easy to save, but the good news is that AJ Bell’s financial priorities survey showed 27% of people were already prioritising it – rising to 32% of Gen X. If these goals feel like a real stretch, don’t be put off from making a start. Just put away what you can afford, as soon as you can afford to do so and focus on what you can manage, rather than on what you can’t.