You might think an emergency fund is a “nice-to-have” rather than an essential, but without this financial safety net, you could soon come unstuck should the boiler break down, the fridge fail – or worse, you lose your job.
Here we look at how having a rainy day fund in place can help you sleep easy – plus other tips to help you get into the savings habit.
Why is an emergency fund so important?
With savings rates so pitiful, many people feel as though there is little incentive to squirrel money away.
But if you take a short-term approach to your savings, you risk leaving yourself vulnerable. Should you lose your regular income – or should something unexpected happen – disaster could strike.
How much should I have in a rainy day fund?
As a rule of thumb, you should aim to have the equivalent of at least three months’ worth of living expenses – or three months’ income – slotted away in an emergency fund.
A decent pot of cash savings will provide an important buffer against periods of financial insecurity which could otherwise be very destabilising.
Which type of account should you use for your rainy-day fund?
You need to ensure your emergency fund is in a safe place, and somewhere where you can get your hands on your cash in a hurry.
With this in mind, most notice accounts and fixed-rate accounts aren’t really going to be suitable.
Easy access account
With this type of account, you can get instant access to your money whenever you need it. That said, make sure you read the Ts and Cs, as some providers may have a limit on the number of withdrawals you can make each year.
As you can now get up to £1,000 worth of savings interest tax-free thanks to the Personal Savings Allowance, you might wonder whether it’s still worth opening a cash ISA. The answer is yes, if you haven’t made use of your allowance – £20,000 in the current tax year. With a cash ISA, you can earn an unlimited amount of tax-free interest now, but also in the future when rates improve. Note, though that while you can easily access money held in a cash ISA, if you withdraw any money, this can’t be replaced.
Top tip for choosing a savings account
When choosing any savings account, be sure to shop around and compare rates of interest available. It’s important to make your money work as hard as it possibly can for you. Useful sites for comparing rates include Moneyfacts.co.uk and Savingschampion.co.uk.
Unlimited access to your money with the new Saga Easy Access Savings account provided by Goldman Sachs International Bank. Find out more.
Emergency fund top tips
1. Review your finances and get to grips with your regular bills so you can accurately work out how long your savings would last for should the unexpected happen.
2. Remember that while it’s important to prioritise paying off debts before trying to amass lots of savings, you can’t afford not to have some sort of emergency fund in place.
3. Keep your emergency fund in a separate account from your day-to-day account. This will help you resist the temptation to dip into money set aside for savings.
4. One of the best ways to build an emergency fund is by putting a little aside after every payday. Better still, set up a regular standing order to go from your current account into a savings account the day after you get paid. That way, you will barely notice it leaving your current account and going into your savings account.
What are the options if you don’t have an emergency fund?
If you don’t have money slotted away in a rainy day fund and find yourself facing an unexpected expense, you might end up considering a payday loan.
But you need to tread very carefully, as while payday loans offer a short-term fix, they can come with very high rates of interest.
A better option may be a 0 per cent credit card. But it’s important not to see a credit card as an “easy” option, as card debt can be expensive and hard to pay off. It can also rack up very quickly. Given that cards punish you harshly once the 0 per cent period ends, it’s also vital you try to repay your plastic before the high rate kicks in.
A further option you might want to look at is a credit union. These organisations are an alternative to banks, building societies and payday lenders, and offer savings accounts, current accounts and loans.
While interest rates can vary, they are capped at a legal maximum of 42.6 APR (annual percentage rate), and are still a lot cheaper than many short-term loans. However, you will have to meet certain eligibility criteria to become a member of a credit union. For more information, visit Findyourcreditunion.co.uk.
Where can I get emergency assistance funds?
If you are on low income and facing financial difficulty, you may be able to apply to your council’s welfare assistance fund scheme. Each local authority operates their scheme differently, with some offering loans, grants – or food vouchers. Note, though, that this can be something of a postcode lottery.
If you are struggling with your finances, there are free organisations you can turn to for help. These include: Citizensadvice.org.uk / 03444 111444, Nationaldebtline.org / 0808 8084000 and Stepchange.org / 0800 1381111.
Tips to help you save up an emergency fund
- Get into the habit of saving a regular amount each month.
- Go through your finances with a fine-tooth comb, and see where you can cut back. By quitting smoking or taking packed lunches to work (rather than having a shop-bought lunch every day), you can reduce your outgoings, leaving you with a little extra to put into savings.
- Set a reminder to transfer any remaining money from your bank account into savings each month.
- Check out apps which take the pennies left over from your spending and put them into savings.
- Make sure your savings, particularly those in old ISA accounts, are not languishing on a poor rate. If they are, transfer them. But be sure to follow the correct procedure when transferring to a new ISA to retain the tax-free status of your ISA funds.
- Once you’ve managed to squirrel away a decent emergency fund, you should then build on this to help you plan for longer-term financial goals.
Find out more about our new Saga Saving accounts provided by Goldman Sachs International Bank.