What’s an emergency fund for? If you’ve ever been hit with an unexpected bill –– you’ll understand know exactly how worrying it can be to not know where the money is going to come from.
That’s exactly why you need an emergency fund. It’s a kind of safety net to help you navigate your way through tougher times and events you hadn’t budgeted for, such as your car breaking down or the washing machine giving up the ghost. Think of it as a pot of money to help you deal with any financial curveballs that life throws at you. Here we take a closer look.
How much do I need to have tucked away in an emergency fund?
If you are looking to build up – or maintain – a cash buffer, the rule of thumb is typically to put aside enough to cover a few months’ worth of outgoings. Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “While you’re of working age, you should look to build an emergency savings safety net big enough to cover three to six months’ worth of essential spending.”
That said, it really depends on your personal circumstances. Some experts suggest setting aside a whole year’s salary in cash for unforeseen circumstances. It’s important to figure out how much is enough for you.
Where should I keep my emergency fund?
You should look to hold your rainy-day fund somewhere you can get your hands on it in a hurry. After all, if an emergency does happen, you’ll likely need to access the money quickly. With this in mind, an instant access savings account could be a good option. With one of these accounts, you can typically withdraw your money right away, without penalty. You should be able to make an unlimited number of withdrawals (assuming funds allow). Just be aware that easy access savings accounts may have lower interest rates than fixed-term or notice savings accounts.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Easy access accounts are popular for their flexibility, and ideal for savers who only want to put away a little bit of cash to grab in emergencies. Using a current account to save every month may be convenient, but these are not always the best home to build a safety net over time, particularly when some pay little to no interest.”
This may all sound sensible, but you still need to tread a little carefully when picking an easy access account. Recent research by TotallyMoney and Moneycomms into 50 of the UK’s top accounts of this type, found that only a third (16 out of 50) gave true unlimited easy access. The remainder carry restrictions or come with rates which reduce after a set amount of time, usually 12 months. At the time of writing, some of the cleanest easy access accounts (with no restrictions), include Charter Savings Bank paying 4.59% and Saffron Building Society paying 4.5%.
Seek out the best rates
Shopping around for an easy-access account paying a decent rate of interest is especially important in light of the latest figures from the Bank of England, which show a whopping £280 billion is sitting in UK accounts earning no interest. Laura Suter, director of personal finance at AJ Bell, said: “People need to take action themselves to ensure that they are getting the most from their cash.” This includes finding a high-paying account for your rainy-day funds.
Suter added: “One of the top paying easy-access savings accounts is paying 4.59%, meaning those with £15,000 in savings could be earning £688.50 a year in interest.” Those with £7,500 would earn £344.25.
What about once you’ve retired?
Once you’ve stopped working, you can start to think about your rainy-day fund slightly differently. According to Coles, at this stage in life, you should aim to have between one and three-years’ worth of essential spending squirreled away in your emergency fund. She said: “If your current savings fall a long way short, building this fund up should be a priority – but don’t overlook the longer term.”
There’s no need to hoard more cash than you need, when it could be working harder for your future in investments and pensions. You don’t want to fall into the trap of unnecessarily sticking to the safety of cash, when you could be investing your money instead. Use our free comparison tools to compare investing fees across a range of platforms.
