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  • Save a penny for a rainy day

    The importance of building up a cash buffer for unexpected emergencies.

    Save a penny for a rainy day: man smiling infront of a number 3 graphical background

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Bad luck has a habit of striking when we least expect it, and usually at the worst possible time. Whether that’s your boiler packing in or the engine light on your car’s dashboard flashing red – the cost of dealing with these bumps in the road all add up.

    While it’s impossible to predict when these types of events will happen, they inevitably will. Our research* shows that a third of people had an expense out of the blue in the past year alone, which set them back an average of £1,420. So, it makes sense to get ahead of the game by building up your rainy-day savings pot – a cash buffer for unexpected emergencies.

    This is the third article in a five-part series – 5 to Thrive – a step-by-step guide to help you succeed in building the foundations to a strong and resilient financial future.

    Here we’ll give you information on the importance of building your cash savings, but it isn’t personal advice. If you’re not sure of the best course of action for you, please ask for professional financial advice.

    Rainy-day savings explained

    A rainy-day savings pot is money that you’ve saved to cover any unplanned emergencies.

    This helps protect you against any income shocks like job losses, or spending shocks – things like repairs to your car or household appliances.

    The last year has highlighted the importance of cash. Yet when the pandemic hit, approximately 1 in 4 people had less than £1,000 in cash savings, a study by the Financial Conduct Authority shows. This is a far cry from the amount people should be holding in their rainy-day reserves.

    Your rainy-day savings pot isn’t the same as the one you dip into for your summer getaway or to do some retail therapy. They can be planned for, so they should be kept separate.

    Where should I keep my cash?

    Your emergency savings should be kept within touching distance. By that, we mean in a savings account you can quickly and easily withdraw from.

    Instant or easy access savings accounts are the best option for this. Withdrawals are immediate for instant access and usually take one working day for easy access.

    Keeping your rainy-day savings as cash also avoids having to sell your investments at a market low point or taking out credit to cover your expenses.

    How to manage your debt levels

    The interest rates you’ll get on cash in your rainy-day savings isn’t life changing. But it’s better than nothing. Cash held in your rainy-day savings isn’t there to build your wealth. It’s there to build up your financial resilience against any unexpected shocks.

    The most popular place to save is your usual bank, but you could get a better rate from shopping around. That’s where a cash savings platform like HL’s Active Savings can help (more on this later).

    It’s important to know how your savings are protected. As long as your money is held with an authorised bank or building society, all eligible deposits will be covered up to £85,000 by the Financial Services Compensation Scheme (FSCS). You can find out more on the FSCS’ website.

    How much cash should I hold?

    There’s no magic number. The amount you hold as cash will vary and depends on your circumstances and lifestyle.

    We think around three to six months’ worth of essential expenses held as cash to cover emergencies is about right.

    If you’re retired, you should hold one to three years’ worth of essential expenses. For those in drawdown, consider erring on the side of caution by having the full three years’ worth of essential expenses.

    Holding more when you’re retired is a good idea because if you need to dip into your rainy-day savings, it could be harder to replenish.

    Understanding your outgoings

    Getting to grips with the different types of expenses helps you understand how much cash you’ll need.

    Expenses can broadly be split into three categories – essential, comfortable and non-essential. Of course, we all differ in how we define this. But here are some examples to get you started.

    Different types of outgoings

    Scroll across to see the full table.

    Essential Comfortable Non-essential
    Rent or mortgage Education costs Eating out
    Food Gym membership Retail shopping
    Utility bills Transport costs Holidays
    Medication/healthcare Mobile phone Alcohol

    Ultimately, the lifestyle you might want to maintain will dictate the level of cash you need to keep tucked away. There’s no right or wrong answer to this, but we think you should at the very least have the ‘essentials’ covered.

    One more thing

    Any planned spending coming up over the next five years that isn’t covered by your income should be held as cash. Things like home improvements or a wedding.

    If you’re holding cash for known future expenses, you have the opportunity to tie it up for a while in exchange for a fixed higher interest rate.

    The trade-off for a higher rate is that you can’t usually access your money until the term ends. Fixed term products usually range between 6 months and five years, but they can have different minimum balances so it’s worth double checking before making your choices.

    Need a home for your cash savings?

    Active Savings lets you pick and mix savings products from a range of banks and building societies, all through one online account.

    Easy access products mean you can move your money out whenever you like – ideal for your rainy-day savings.

    Once you’re set up there’s no more paperwork or hassle when choosing savings products – no more application forms or proving who you are every time. Just a selection of products with great rates all under one roof.

    Find out more about Active Savings

    *HL survey April 2021 – 767 respondents

    The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Read the rest of our 5 to Thrive articles

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    Control your debt

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    Protect you and your family

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    Plan for later life

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    Invest to make more of your money

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