diff --git a/packages/core/src/InstanceSettings.ts b/packages/core/src/InstanceSettings.ts
index 9332212edae9f..6802914c974ff 100644
--- a/packages/core/src/InstanceSettings.ts
+++ b/packages/core/src/InstanceSettings.ts
@@ -63,10 +63,11 @@ export class InstanceSettings {
 				errorMessage: `Error parsing n8n-config file "${settingsFile}". It does not seem to be valid JSON.`,
 			});
 		} else {
+			// Ensure that the `.n8n` folder exists
+			mkdirSync(this.n8nFolder, { recursive: true });
 			// If file doesn't exist, create new settings
 			const encryptionKey = process.env.N8N_ENCRYPTION_KEY ?? randomBytes(24).toString('base64');
 			settings = { encryptionKey };
-			mkdirSync(path.dirname(settingsFile));
 			this.save(settings);
 			// console.info(`UserSettings were generated and saved to: ${settingsFile}`);
 		}
diff --git a/packages/core/test/InstanceSettings.test.ts b/packages/core/test/InstanceSettings.test.ts
index 6d6e46ab9f883..05899e9c89490 100644
--- a/packages/core/test/InstanceSettings.test.ts
+++ b/packages/core/test/InstanceSettings.test.ts
@@ -4,13 +4,15 @@ import { InstanceSettings } from '@/InstanceSettings';
 describe('InstanceSettings', () => {
 	process.env.N8N_USER_FOLDER = '/test';
 
+	const existSpy = jest.spyOn(fs, 'existsSync');
+	beforeEach(() => jest.resetAllMocks());
+
 	describe('If the settings file exists', () => {
-		beforeEach(() => {
-			jest.spyOn(fs, 'existsSync').mockReturnValue(true);
-		});
+		const readSpy = jest.spyOn(fs, 'readFileSync');
+		beforeEach(() => existSpy.mockReturnValue(true));
 
 		it('should load settings from the file', () => {
-			jest.spyOn(fs, 'readFileSync').mockReturnValue(JSON.stringify({ encryptionKey: 'test_key' }));
+			readSpy.mockReturnValue(JSON.stringify({ encryptionKey: 'test_key' }));
 			const settings = new InstanceSettings();
 			expect(settings.encryptionKey).toEqual('test_key');
 			expect(settings.instanceId).toEqual(
@@ -19,19 +21,24 @@ describe('InstanceSettings', () => {
 		});
 
 		it('should throw error if settings file is not valid JSON', () => {
-			jest.spyOn(fs, 'readFileSync').mockReturnValue('{"encryptionKey":"test_key"');
+			readSpy.mockReturnValue('{"encryptionKey":"test_key"');
 			expect(() => new InstanceSettings()).toThrowError();
 		});
 	});
 
 	describe('If the settings file does not exist', () => {
+		const mkdirSpy = jest.spyOn(fs, 'mkdirSync');
+		const writeFileSpy = jest.spyOn(fs, 'writeFileSync');
+		beforeEach(() => {
+			existSpy.mockReturnValue(false);
+			mkdirSpy.mockReturnValue('');
+			writeFileSpy.mockReturnValue();
+		});
+
 		it('should create a new settings file', () => {
-			jest.spyOn(fs, 'existsSync').mockReturnValue(false);
-			const mkdirSpy = jest.spyOn(fs, 'mkdirSync').mockReturnValue('');
-			const writeFileSpy = jest.spyOn(fs, 'writeFileSync').mockReturnValue();
 			const settings = new InstanceSettings();
 			expect(settings.encryptionKey).not.toEqual('test_key');
-			expect(mkdirSpy).toHaveBeenCalledWith('/test/.n8n');
+			expect(mkdirSpy).toHaveBeenCalledWith('/test/.n8n', { recursive: true });
 			expect(writeFileSpy).toHaveBeenCalledWith(
 				'/test/.n8n/config',
 				expect.stringContaining('"encryptionKey":'),
@@ -41,16 +48,13 @@ describe('InstanceSettings', () => {
 
 		it('should pick up the encryption key from env var N8N_ENCRYPTION_KEY', () => {
 			process.env.N8N_ENCRYPTION_KEY = 'env_key';
-			jest.spyOn(fs, 'existsSync').mockReturnValue(false);
-			const mkdirSpy = jest.spyOn(fs, 'mkdirSync').mockReturnValue('');
-			const writeFileSpy = jest.spyOn(fs, 'writeFileSync').mockReturnValue();
 			const settings = new InstanceSettings();
 			expect(settings.encryptionKey).toEqual('env_key');
 			expect(settings.instanceId).toEqual(
 				'2c70e12b7a0646f92279f427c7b38e7334d8e5389cff167a1dc30e73f826b683',
 			);
 			expect(settings.encryptionKey).not.toEqual('test_key');
-			expect(mkdirSpy).toHaveBeenCalledWith('/test/.n8n');
+			expect(mkdirSpy).toHaveBeenCalledWith('/test/.n8n', { recursive: true });
 			expect(writeFileSpy).toHaveBeenCalledWith(
 				'/test/.n8n/config',
 				expect.stringContaining('"encryptionKey":'),