As we are now (already) in April; the thought of April Showers sprung to mind and then on to the old adage of ‘saving for a rainy day’. Putting an amount away each month can prepare us for that rainy day when it does come, maybe in the form of a broken washing machine, failing roof or illness meaning we are unable to work. The BBC reported that around half of UK households were spending more than they earnt in 2018, with no savings to fall back on at all, in effect were borrowing to meet their monthly commitments.
Why do I need an emergency fund?
Having a rainy-day fund, or emergency fund as it is more formally known, can provide a cushion against the unexpected removing the need to borrow money, which is always going to cost you more in the form of interest and arrangement fees.
How much should I hold?
When we are asked as independent financial advisers we will usually say 6-12 months net pay (after tax). For most of us, not being able to work thorough illness or unemployment for a few months would have a financial impact. Having a level of financial cushion would give us time to make changes, apply for benefits or change our circumstances and be able to keep up with mortgage/rent and other bill payments.
Where should I save my emergency fund?
You need your emergency fund somewhere safe and accessible, but away from your usual current account, so you cannot spend it easily. We recommend setting up a direct debit or standing order to put a small amount of your salary into a separate account on a weekly or monthly basis. Suitable places might be:
Premium Bonds, easy access, and chance to win prizes each month. Prizes are tax-free and don’t count towards your Personal Savings Allowance.
A Credit Union; a locally based savings organisation, often offering better interest rates than a bank or building society.
An instant access cash ISA with a bank or building society
An instant access bank deposit account.
In an ideal world, you should make saving regularly a habit. Even putting away small amounts, such as £3 per day adds up to over £1,095 per year and gets you into the savings habit. If you set up a regular payment to a separate account, once you get over the 6-12 months of net income, you can look seriously at investing the surplus.
What if I have more savings than this?
Your emergency fund needs to be there in time of need, so investment would be a risk too far, but once you have a suitable sum saved you can look to be more adventurous.
The key difference between savings and investment is the reliability of returns; saving will be predictable with the contracted return in the period retained. With investment, although the return should be higher, market forces remove the certainty of return within a given timeframe. Investment is something that a professional independent financial advice firm, such as Martin-Redman Partners can assist you with in a range of products such as ISAs, Unit Trusts and Open Ended Investment Companies.
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About Martin-Redman Partners
We are a team of experienced Financial Advisers who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.