How do you prioritise your money/savings?

[ChocolateChipMuffin2016]

I have always been quite bad with money, but since combining finances with DH, I have improved and we live within our means with a bit to spare.

We currently have savings/are saving for thing like paying insurance, "oh shit" fund (if one of us becomes unable to work etc), the car, Christmas and birthdays and individual savings.

Anyway, my question is, how do you know what you should save and where?! I think we have all the basics covered, but I read things on places like MSE and we should be over paying our mortgage and investing as much as we can into our pension, then our emergency fund is not really big enough (it's 2 1/2 month of expenses atm and will be over 3 months this time next year). It seems like all these things should be done as early as possible in order to get the best return (we're both mid 30's), but the reality is we have only a very small amount left after all these expenses, unless we chose to really cut back. We are having one very cheap holiday with family this year (didn't have a holiday at all last year) and are not massively extravagant. We also have some home improvements to make, again nothing huge, but £500 here and there (nothing urgent, just things which would make our environment nicer!). Lastly, we would like to have another baby soon, so I don't want to commit to something I then can't get out of while I'm on mat leave.

So, if you don't mind me asking, how do you prioritise spare money? And if you were me, what would you do?

Not an expert but:

We keep an account topped up with 12k. This is an emergency fund that is designed to cover large expenses like appliances breaking, unexpected car repairs and temporary unemployment. If this dwindles our savings priority is to top this back up.

We have a second account which then goes to paying down our mortgage each year. Last year this was quite a lot as DH had an inheritance and this is what he wanted to do with it, usually it's a few thousand.

There is then a third smaller savings account which is 'treats'. This might contribute to a holiday, yearly passes for entertainment for DC, school holidays entertainment, or goods such as a new TV. This account can
Vary drastically in how much goes into it!

Our savings priorities are in the above
order.

Thank you, that’s very helpful. I was thinking the emergency fund was something we need to focus on a bit more, so that makes sense to me!