Emergency savings – how much cash should you hold?

Nearly four in ten people suffered expenses out of the blue in the last year*. These weren’t small amounts either – the average cost was £1,420.

Worse still, more than half of those who experienced unexpected costs had to borrow to cover them. And one in four people said they don’t have any emergency savings at all.

We’ve made some impressive strides forward with our finances over the past year, with UK households squirreling away over £180bn. That said, one in seven people still don’t have any plans to build an emergency safety net.

Lockdowns have deprived us from dining out or buying a new pair of trainers which helped lots of us save up cash without really trying. But as we start to emerge from restrictions and things start to reopen, we might need to make a more conscious effort to cut back.

Before we bounce back to more normal circumstances, it’s probably a good time to remind ourselves why it’s important to keep some cash tucked aside.

This article gives information to help you improve your finances, but isn’t personal advice. If you’re not sure if a course of action is right for you, seek financial advice.

*HL Survey of 2,000 UK adults conducted by Opinium, April 2021.

Why hold cash in the first place?

The pandemic’s been a stark reminder to expect the unexpected and the importance of having emergency savings. While it might be an extreme example and could be something we never experience in our lives again (touch wood!), we all need money set aside to cover the unexpected within reaching distance.

We use cash for things like a new boiler, car repairs, or just a safety net in case there are income shocks like unemployment.

These types of expenses never seem to come at a ‘good’ time. But borrowing money to cover them will only increase the overall cost and could put your finances in disarray. Keeping some cash set aside makes your finances more resilient and gives you peace of mind.

Read more about the importance of holding cash

How much should you hold?

While our survey respondents got hit with an average cost of £1,420, that’s not a suggestion of how much you should hold. Everyone’s different. There’s no magic number or one-size-fits-all approach, but we think there’s a simple way to work out what’s right for you.

In general, you should think about holding at least three to six months’ worth of essential expenses as cash in your emergency savings.

If you’re retired, then you should consider holding more. We think it’s sensible to hold around one to three years’ worth of essential expenses if you’ve finished working. Holding more cash helps when it comes to things like fluctuating income from drawdown.

It’s important to look at expenses here instead of income. Higher income usually leads to higher expenses, but some of these can be given up if push comes to shove.

Essential expenses are things like rent/mortgage, food, utility bills, council tax, medicines and insurance. Basically, the really important stuff you can’t go without.

Get more help to calculate your figure

Where should you keep it?

There’s not much point building up an emergency savings pot if you can’t access it when you need it. That’s why it makes sense to look at easy or instant access savings accounts.

Holding this money in a savings account rather than your current account means it’s ringfenced. That way, you won’t be tempted to go shopping with it or get it mixed up with your day-to-day spending.

The most popular destination when choosing savings accounts is usually the same bank you have your current account with. But this might not be the best option. Most high-street banks pay next to nothing with 0.01% interest on instant access accounts. That’s not going to help you build your emergency fund, and it’s a far cry from inflation rates which means you will be losing money in real terms.

Unfortunately, in the current market no easy or instant access account beats inflation. But you could limit the impact by looking further afield than your high-street bank. You’ll be surprised how much difference this could make over the long term.

Use our calculator tool to see what a better rate could do to your savings.

Boost your emergency savings with Active Savings

Active Savings allows you to choose savings products from lots of banks and building societies, all through one online account. You can choose easy access products, which give you fast access to your money while paying much higher rates than large, high-street banks.

High-street banks offer instant access products which allow for instant withdrawals. Active Savings offers easy access products and withdrawals usually take one working day.

Plus, if you’re already an HL client, you can manage your savings alongside your investments and see everything together when you login.

Looking beyond emergency cash

For cash savings over and above your emergency fund, you could look at fixed term products. They typically pay a better rate than easy or instant access products, but you can’t usually access your money until they end.

You don’t need to lock your money away for long though. With Active Savings, you can fix from a matter of months, or up to five years if you’d prefer. You don’t get that level of choice by going direct with most high-street banks.

Fixed terms can be a great way to save towards expenses you know are coming up in the future. For example, a new car or home improvements. As you know when the products will end, you can time them so you have access to your money when you need it. All while boosting your overall return.

Are my savings protected?

When you save with Active Savings, your money is held directly by the banks you choose.

All our partner banks on Active Savings are covered by the Financial Services Compensation Scheme (FSCS), which covers eligible deposits up to £85,000 per banking licence.

More on the FSCS

*AER (Annual Equivalent Rate) - AER shows what the interest rate/expected profit rate would be if it was paid and compounded once each year. It helps you compare the rates on different savings products.

Gross - The interest rate without any tax removed. Interest/profits are paid gross. You are responsible for paying any tax due on interest/profits that exceed your Personal Savings Allowance to HM Revenue & Customs. Tax treatment can change.

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.