When the sky is blue and the sun is shining, it seems that saving for a rainy day fund is the last thing on our minds. A recent report from Lloyds Bank revealed that more than a third of adults (36%) have fewer than three months’ worth of essential spending in savings. Even worse, one in eight people in the UK do not have a rainy day fund of any kind.
Losing your job and your income, or having to pay legal fees or a large unexpected cost out of the blue, can leave you scrambling around for cash.
For many people, dipping into your investments, ISAs or pensions are the only ways to weather the storm. These can result in unexpected delays, penalty fees, or sales of company shares when their market value is low.
Saving for a rainy day fund can help you cover financial mishaps, all without too much stress or additional costs. Having an emergency fund that you can access quickly and easily, if such a crisis arises, can give you peace of mind and additional financial security for you and your family.
Who needs a rainy day fund?
Everyone. Regardless of how wealthy you are, it is likely there is going to be a time when you encounter an unexpected cost that gives your bank balance a knock, whether it’s to fix the car on the driveway or the yacht in the harbour. Most people only have a certain amount of money in their current accounts at one time (and rightly so). The rest is squirreled away into investments, ISAs, properties and pensions.
Freelancers and start-up business owners can be more at risk. Being your own boss has plenty of perks. You can make your own schedule, choose your own projects, and can decide to take time off as you wish. All this freedom comes at the price of your financial security. If you are lucky enough to be your own boss, then having a substantial rainy day fund is essential. This ensures that if you are unable to work for an extended period or lose key clients, you will have enough money to pay the bills and put food on the table.
How much money should you have in your rainy day fund?
Your emergency fund can protect you from unexpected expenses you may encounter. It needs to be the right amount, so you are fully covered. How much money you should have will vary depending on your lifestyle, monthly costs, income, and dependants. The general rule of thumb is to put away at least six months' worth of expenses. This means if you are made redundant or are unable to work for a period of time, you can survive without dipping into other reserves or, even worse, going into the red.
It’s important to remember to top up your rainy day fund after the storm, if you dip into it.
Where should you keep your rainy day fund?
With thousands of pounds at stake, you need to find a safe home for your rainy day fund. You also need to be able to access the money quickly and easily whenever an emergency arises. Avoid keeping the money in a current account as this may mean you dip into it without noticing. Although the purpose of the fund isn’t to grow the money, choosing an account that does this without risking any capital is an advantage.
For married couples, it’s beneficial to put the rainy day fund in the name of the lowest taxpayer. This should give you a larger personal savings allowance and allow you to pay a lower income tax rate on interest earned.
If your rainy day fund is below £85,000 it can be held in an accessible savings account attached to your bank account. Consider putting larger sums of money (over £85,000) in a National Savings and Investments (NS&I) Direct Saver account. This will ensure the full amount is protected, accessible and that the interest earned is paid gross before tax. As the NS&I website states, “We're backed by HM Treasury. So all the money you invest with us is 100% secure. Always’.
At Capital we believe in preparing for rainy days, so you can ensure clear blue skies are never far away.
Your Capital financial planner will calculate and advise you on how much money you should put away and the most financially and tax efficient way of holding your money. If you would like to discuss your emergency rainy day fund with one of our Chartered Financial Planners, please contact us today.