Why it makes good financial sense to have an emergency fund

None of us can escape the fact that the cost of living is on the up.

Households are facing higher energy bills, food bills and petrol costs, and in the recent Budget, Chancellor Rishi Sunak warned of ‘challenging months’ ahead, with inflation set to jump from 3.1% up to an average of 4%.

Equally, while small wage increases were announced, there are concerns that many people could end up worse off next year amid spiralling costs and tax rises.

With a feared winter squeeze on household budgets – and signs we could be in this for the long haul – it pays to be prepared.

One of the first things you need to do to build some resilience into your finances is to put an emergency fund in place. Here we show you how.

Why is an emergency fund so important?

By having a rainy day fund, this will mean you have money to fall back on should the unexpected happen, or should you find yourself without income for a period of time.

This cash will help see you through, and help you face whatever lies ahead.

A decent pot of savings will provide an important buffer against periods of insecurity. It will mean you will still be able to pay your rent or mortgage, and afford essentials, such as food and utility bills.

Without this cushion in place, you risk facing financial disaster.

How much should I have squirreled away?

Slotting money away for the future may seem very challenging in the current climate, with so many demands on our cash, but the good news is, you don’t need to save huge amounts to make a real difference over time.

As a rule of thumb, you should look to have the equivalent of between three and six months’ worth of living expenses put aside.

To work out how much you need, tot up all your essential outgoings, and multiply this by the number of months.

Where should you keep your emergency fund?

Your rainy day fund should be in a competitive easy access account so you can get your hands on your cash quickly, should you need to.

The problem is, with inflation at a high, most people’s savings are effectively losing value.

This makes it more important than ever to shop around and get as good a return as you can.

You can currently get up to around 0.6% on an easy-access account. To compare rates, head here.

Read the Ts and Cs

Always scour the Ts and Cs before opening an easy-access account. You should check things such as the minimum and maximum deposit, and whether there are any limits on the number of withdrawals you can make per year.

Ideally, you want to choose an account that you can dip in and out of easily, without restrictions.

Tips for building a rainy day fund

• Make a point of keeping your emergency fund separate from your day-to-day account where you keep your spending money. This will ensure you don’t unintentionally – or intentionally – dip into money set aside for savings
• One of the best ways to build up a rainy day fund is by setting up a direct debit to go from your current account into your easy-access account on payday each month. That way, you will barely notice the money leaving your account
• If you are struggling to free up cash to save, look closely at your spending to see where you can afford to cut back and what you can manage without. Simple steps could include cutting out takeaway coffees, cancelling subscriptions to services you no longer use, and shopping around for better deals on essentials such as broadband and your mobile phone. Also be sure to shop compare deals on things such as your car cover and home insurance at renewal time

Can’t I use a credit card?

You might think that if you’re facing an unexpected expense – such as a boiler breakdown or your car failing its MOT – and don’t have an emergency fund, you could just put the cost on a credit card.

The problem is, unless you’re careful, card debts could soon rack up, you may find yourself in a position where it’s hard to pay off your plastic.

Choose a 0% purchase card

If you have no choice but to turn to a card, make sure you seek out a 0% purchase card. That way, you’ll be able to spread the cost over a period of time without paying interest.

You can currently get cards offering more than 20 months interest-free. You can compare rates here.

But don’t forget that with any purchase card, if you fail to clear the balance before the 0% period ends, you will be charged interest. Do all you can to repay your plastic before the high rate kicks in.

Better still, work hard to build your emergency fund. That will give you the peace of mind of knowing you can survive tough times ahead in 2022 without having to borrow to make it through.

Continue to build savings

Once you’ve got your emergency fund in place, you should continue to build resilience by building savings elsewhere.

The good news is, improved competition means savings rates are on the up. And, if the Bank of England does increase the base rate – as is being widely speculated – we could see rates edge up further still.

For cash you won’t need for another six months or more, look at locking it away in a fixed-rate account, as these accounts pay some of the best rates.

Equally, if you’re not comfortable about tying your money up, a compromise option could be a notice account. The maximum notice term is currently around four months, and you may be able to find rates above 1%.

Shop around to find the very best rates available.

The key is to get into the savings habit. This will mean you are on stronger financial footing to get through whatever lies ahead.

Find a new savings account