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Why you need an emergency fund

umbrella in rainThe past decade has not been much fun for savers. While low interest rates are great for borrowers they are not much good for savers – who after all massively outnumber borrowers.

So perhaps it isn’t surprising that Britons are saving less. Figures from the Office for National Statistics show that in 2008 the UK households’ saving ratio was 7% but now it is 3.8%. This ratio measures savings as a share of disposable income: in other words, the amount of cash we have spare at the end of the month which we put away for a rainy day.

But things are looking up for savers. According to statisticians Moneyfacts rates on easy access accounts – the type of account you need for emergency funds – have gone up substantially over the last two years although are still below rates seen 10 years ago. Today Moneyfacts says the highest easy access savings account is Virgin Money, paying 1.5%. In March 2009 the highest was Egg (remember them?) which paid 3.35%. The Virgin Money rate is 0.24% higher than it was paying a year ago.

You don’t need an easy access account for your rainy day money: you could use a cash Isa. But the rates aren’t great and we at Skinted Minted Mum think you’d get better returns over the long time if you put your £20,000 annual allowance in a share Isa rather than a cash one. Do remember you have until 5 April to use this allowance or you’ll lose it – and see Jane’s blogs and advice on investment Isas here.

And even though rates have gone up on easy access savings accounts, they are still pretty low – with inflation at 1.6%, you’re losing money on your savings even in the better accounts. So don’t overdo it: the standard advice is that you should have three months’ income on deposit as an emergency fund. If you’re thinking of investing, it’s often said that you shouldn’t do so until you have at least six months’ income on deposit. And of course, there is little point in having savings if you also have personal (non-mortgage) debt. Pay off your credit cards/personal loans and then start saving.

Personally, I have a reasonable chunk of money on deposit but it does get whittled down at an alarming rate as my definition of ‘emergency’ spending is a little wide ranging from having to get a new boiler to needing a holiday. Yours might be more sensible. You can find the best savings rates at comparison sites including Moneysupermarket*, uSwitch*, Comparethemarket* and Confused.com.

And see our guides to saving here

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Wednesday, 22 May 2019