Rainy-day savings

It's useful to have an emergency fund for when things unexpectedly go wrong. Find out more about rainy-day savings for life's unpleasant surprises…

Key points

  • Try to build up between three and six months' worth of salary in an emergency fund
  • It needs to be easily accessible - instant access accounts are a common choice
  • Consider rates offered by current accounts as well as dedicated savings options

Are you financially prepared with savings to deal with large and unexpected domestic costs, such as a car repair or a broken-down boiler?

If not, you're far from alone - research by Gocompare.com revealed that 47% of consumers thought they should have rainy-day savings of £1,000 or more, but suggested that 59% had less than that squirrelled away.[1]

A quarter of those surveyed had no emergency fund whatsoever.

While any back-up savings are good, typical guidance is to try to build up a minimum of three months' worth of salary as an emergency fund.

If you're debt free, try to increase that to around six months' worth of salary, but beyond that you may want to start thinking about doing more with your money - by keeping it all in an easily accessible pot you may be missing out on higher interest or growth potential.A piggy bank wearing a pair of sunglasses

Reasons to build up a rainy-day fund

Unforeseen expenses are an inevitable part of life but, without savings, you might have to borrow money to pay them.

As loans generally involve paying significant interest, this could lead to further financial hardship.

An emergency pot could help you avoid this, and to accrue a little interest in the meantime if you don't need to dip into it.

Where to keep emergency savings

You'll probably want to keep your rainy-day fund in a savings account where it'll earn the most interest.

Check there are no penalties for withdrawing your money at short notice
Matt Sanders, Gocompare.com

It's important to think about accessibility as well as interest rates - if you lock your funds away in a savings account where you don't have instant access to them, they'll be useless in an emergency.

When you compare savings accounts on Gocompare.com you'll have the option to filter your results to only include easy-access accounts that let you lay hands on your money quickly.

"When choosing a savings account, check there are no penalties for withdrawing your money at short notice," said Gocompare.com's Matt Sanders.

"There's little point having emergency money in a 90-day notice account."

Deciding where to put emergency savings was made a little easier in April 2016 when rule changes gave basic-rate taxpayers the first £1,000 of interest they earn in a year free of tax.

Even so, when weighing up your options it's worth considering Individual Savings Accounts (Isas), where rates can be attractive and you don't pay any tax on interest - read more in our beginners' guide to Isas.Pound coins and a £5 note

Current accounts for emergency funds

Bear in mind that some current accounts offer attractive interest rates, so you could consider comparing and switching.

If you use Gocompare.com's comparison service you can rank current accounts by in-credit interest rate, and some might even have a switching incentive which could serve as a lump-sum to start your rainy day savings with.

If you use your regular bank account you do need to be disciplined enough to be able to mentally separate your day-to-day spending from your emergency fund in a single account, though.

Also try to think about the longer-term benefits of compounding interest gains you make.

How to build a savings pot

If finances are already stretched, amassing three months' worth of savings might seem easier said than done, but it's all about having a strategy and building up funds over time.

Credit cards are a good alternative, but only if you pay off the balance soon afterwards
Matt Sanders

"While you should prioritise paying off your debt before trying to amass lots of savings, it's a good idea to try to build up a reasonable emergency fund in an easy-access savings account," said Sanders.

"Compare what rates of interest are available for the sort of sum you're looking to build up and start paying in regular amounts, even if it's just a few pounds a week."

One good rule of thumb is to work out 5% of your weekly income and try to put this into savings each week.

Work out how you could cut back by this amount, perhaps by stopping buying expensive coffee, or making your own sandwiches.Cash Isas

What constitutes a 'rainy day'?

According to Gocompare.com's survey, the number-one rainy-day expense was an unexpected repair or replacement of a home appliance, with more than half of respondents (56%) citing this.

A car repair bill was second, with 51% of respondents naming this. Home repairs such as fixing a roof leak (50%) or boiler (49%) also ranked highly.

Alternatives to rainy-day savings

In the survey, borrowing was by far the most common alternative to rainy-day savings, with 33% of consumers using a credit card to cover emergencies, 18% borrowing from friends and family and 5% resorting to payday loans.

Loans

Although friends and family might not charge you any interest, taking a payday loan could quickly snowball into significant debt, so if you've no other borrowing to fall back on it's especially important to try to save some emergency funds.

A personal loan might have a more attractive advertised APR, but unless you have a good credit rating you may not qualify for the best deals.

Consider the pros and cons of self-insuring against taking out an income protection policy

Personal loans may also take some time to arrange, meaning they might not be ideal in an emergency.

Credit cards

Using a credit card, particularly one with an interest-free introductory rate, could help to spread the cost of a significant repair or purchase, but if you don't repay during the interest-free term you might end up out of pocket.

"If you have no savings and you need to pay a bill for an emergency, credit cards are a good alternative, but only if you pay off the balance soon afterwards," said Sanders.

"With many credit cards, even those without a special interest-free period for purchases, you'll have up to 56 days to repay the balance and not incur interest.

"The actual interest-free period depends on your own statement date and when you made the purchase but you shouldn't rack up interest until you've received your next statement and had the opportunity to repay any spending in full by your set payment date."

If you have a good credit score you might be able to get cards with longer 0% deals and balance transfer cards to help spread the cost even further.

To get really financially savvy, a top tip is to begin amassing your rainy-day savings and also try to boost your credit rating - this can give you easier access to 0% and low-interest credit cards.

Then, if you have a 'rainy day', you'll have the option of dipping into your savings, or using a 0% or low-interest credit card to spread the cost, leaving your rainy day fund untouched and earning interest while you repay the card.Income protection

As rainy day funds are all about accessibility and flexibility, having a strategy like this should help you better weather a domestic financial storm.

Income protection

Income protection is a useful product for anyone who wants to cover their salary so they don't fall behind with monthly outgoings should they be unable to work, due to ill health or unemployment.

Depending on your circumstances such products could prove very beneficial, but remember to factor in any government benefits you may be entitled to and/or support and redundancy packages from your employer.

Consider the pros and cons of what's known as self-insuring - paying the premiums you would lay out on an insurance policy such as income protection and instead paying them direct into your own savings account.

By Derri Dunn