How much cash should you hold?

Why should you hold cash?

Cash savings are reliable, and boring. And serve two purposes:

Goals within the next five years

Use fixed terms. You’ll get a fixed rate for a set period so you’ll know exactly how much you’ll get back. But remember, you usually can’t withdraw until the term has ended.

If you have a goal in mind within the next five years, you can time your fixed term, so you get the money back when you need it.

Unexpected costs

Use easy access. They allow unlimited withdrawals, whenever you want. The trade off is you will usually get a lower rate on your cash than if you used a fixed term.

If an unexpected cost comes up, you’ll need money in easy access so you can get to it immediately.

The first thing you should do is build your emergency pot.

Unexpected costs are, well… unexpected. And they can put you in debt if you’re not prepared for them.

Therefore, you need to prepare - even if you have a steady income.

The results reinforced the need for emergency savings.

Fortunately, many people paid for these costs with savings.

But worryingly, many people put some of it on a credit card, borrowed from family and friends or dipped into their overdraft.

Borrowing from family isn’t always an option, while falling into debt can mean racking up interest charges while you pay it back. There’s also the chance of another expense coming up before you’ve paid off the last – making problems worse.

You should build up your emergency fund as soon as possible.

The goal is to have enough savings to cover unexpected costs, even if they come in quick succession.

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How much cash do people currently hold?

As we go through life, our spending habits change as we have different priorities, which impacts how much we should be saving in our emergency cash buffer.

Proportion of spending per age group

But an expensive surprise can hit us at any stage and leaves many of us at risk.

Some groups struggle particularly to build up cash savings.

People who are renting are far less likely to have more in savings. Around half fall short compared to around a quarter of those with a mortgage.

We also found for those earning between £30,000 and £50,000, more than 30% didn't have at least three months' worth of essential expenses saved for a rainy day. This increased for those earning less than £30,000 a year to around 60%.

There are even big gaps in emergency cash savings among people you’d expect to be able to save with ease. Some 8% of people with household income of £70,000 to £100,000, and 11% of those above £150,000.

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How much cash should people hold?

Having a figure that works for everyone is impossible.

A young person in shared-rental accommodation outside London, with low outgoings, will be able to cope on much less than someone with children in private school, an expensive car lease and a large mortgage.

That's why it makes more sense to look at your household expenses.

Calculating your household expenses

Firstly, work out what you’re spending – and what you’re spending it on.

Then decide which of those expenses would be essential to cover if you lost your income.

As a starting point, you could split your spending like we’ve done below.

All of us are different, with different interpretations of essential. The decision over which expenses to cover will depend on the compromises you’re prepared to make during tough times. It will also depend on the savings target you’re happy to aim for.

How much cash to hold when you’re working

If you lose your job, it can take time to start earning an income again. Each person’s experience of finding work is different, and it’s harder to find employment in some industries or roles.

If you think you’ll find it harder to get a new job, or you don't work for a company that has a generous redundancy policy, hold more savings.

Being able to afford the essentials gives you breathing space while you get back on your feet.

So how much could it be?

If the savings target seems offputtingly large, it can help to aim for 3 months of the essentials. Once you have that, start tailoring it more to your needs.

How much cash to hold when you’re retired

It’s a sizeable amount, but once you’re retired and typically living on a lower income, it’s harder to top up your pot if you need to access it.

We’ve used ONS data to show the average household expenditure for people aged 60 and over. The figures are split into essential expenses, which are goods or services purchased because they meet a basic need (food, shelter, or healthcare). And total expenses which include essential and non-essential purchases.

These figures are based on people aged 60 and over, but their retirement status is unknown.

One to three years might seem broad, but the amount you should hold in cash differs depending on your circumstances. And especially where your income is coming from in retirement.

If all your spending is covered by the state pension, Defined Benefit (DB) pension scheme or an annuity, you might only need to hold one year of expenses.

If a large portion of your income is coming from your investments, then you might want a larger buffer in case of a sudden drop in the market or investment income.

Cash for planned expenses

In addition to your emergency fund, you should keep any expenses planned in the next five years as cash rather than investing the money. That’s because investments can fall as well as rise in value and it shelters you from needing to sell investments during a market downturn. So, you could choose to hold a higher cash balance than what we’ve outlined above.

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What should you do with your cash?

You could hold the cash in an instant access account with a high street bank.

This is where the majority of cash savings are held, with people often looking to the same bank that houses their current account.

This can be a problem. While not touching your money saves you some time, you’ll often get poor rates. If you’re holding large amount of cash, your losses could be significant.

Why should I care about my rate?

If the rate of inflation is higher than your interest rate, your money will start losing its spending power.

That means your cash will lose its value over time.

For example, if the rate of inflation is 5% over one year, and you have £10,000 earning 1%, your money will be worth £9,600 at the end of the year. That's £400 lost.

It's crucial you spend time considering the right home for each part of your savings, to make sure the rate you're getting is competitive.

Your emergency money

You should consider holding it all in an account you can access easily that offers a competitive rate.

The gap between the bottom and top easy access rates can be shocking, so it’s vital to shop around for a good deal. These are mostly offered by newer banks, online players, and building societies.

Money you plan to use in the next 5 years

Once you’ve sorted out your emergency pot, fixing your cash often gets you a better rate.

That means your money fares better against inflation, but you usually can’t access the cash until the term ends.

If you know when you’ll need the money back, you can tie it up for that period, and get guaranteed returns.

You can fix for a few months to several years, and hold multiple products at once.

Keeping it all under one roof

You’ll open new accounts when you see a rate you like, and juggle handfuls of logins and account details.

Savings platforms like Active Savings lets you spread money across multiple banks, and multiple products, in a single online account.

You don’t have to fill in new applications when you want to switch your money to something that suits you.

Plus, our banking partners offer consistently competitive rates.

If you’re uncomfortable with keeping money at a smaller bank or building society, just remember the first £85,000 of eligible deposits held with each institution should be 100% protected though the Financial Services Compensation Scheme (FSCS). Please note if you have savings with different banking brands that are part of the same banking group, the compensation limit applies to the total amount across all your accounts.

Discover Active Savings

Should I save or invest?

Once you’re putting money away for 5 years or more, cash is rarely the best option. Inflation is the general rise in prices of the stuff we pay for every day. The cash we have today won’t have the same buying power tomorrow. Over time, this effect really adds up.

Investing can give you a better chance of growing your money over the long term and, importantly, keeping up with or beating inflation. But it’s important to make sure you have your emergency cash in place before you consider investing.

Unlike the security offered by cash, investments can go down in value and you could get back less than you put in. For some people that’s a risk they don’t want to, or can’t take. This could be because they need the money for something specific and have no other way of paying for it, if they don’t meet their targets.

If you invest over a short period, for example less than 5 years, there’s more chance that a stock market fall could derail your plans. For a period over 5 years, investing in the stock market has typically produced superior returns compared to cash savings.

There will also be investors with some cash in their investment portfolio. This is normal. But it’s not a long-term investment plan. Cash has specific roles for identifiable reasons such as for paying account charges. It shouldn’t be floating around in an investment account for years because you’re not sure what to do with it.

Find out more about savings vs investing

How are my savings taxed?

The amount of tax you pay depends on your personal savings allowance. This lets you earn a certain amount of interest tax-free. Your allowance depends on what rate of income tax you pay. The below figures assume a standard Personal Savings Allowance for the 2023/24 tax year:

If you’re married or in a civil partnership you could split your savings with your spouse to effectively have a combined PSA of up to £2,000.

The personal savings allowance is calculated using rest of the UK, not Scottish, income tax bands. Tax rules can change, and benefits depend on personal circumstances.

Is a Cash ISA right for you?

All interest earned within a Cash ISA is free from UK income tax. You can save up to £20,000 across the different types of ISA each tax year. Deciding whether a Cash ISA or a savings account is right for you will depend on two things:

• How much of your annual £20,000 ISA allowance you have left.
• Whether you're going to exceed your personal savings allowance (PSA). And pay taxes as a result.

You can hold emergency savings in an easy access Cash ISA. Or, you can lock money away in a fixed rate Cash ISA. In the HL Cash ISA, you can do both in a single tax year.

What about premium bonds?

Some people like to keep cash in Premium Bonds. The downside is that there’s no interest on these bonds, so unless you win enough prizes, you’ll lose money after inflation. In the average month, the average saver will win nothing, so odds are you’ll end up gaining nothing.