How to save for the unexpected

If you need a reason why it’s a good idea to have an emergency pot of cash, look no further than 2020.

The coronavirus outbreak has impacted many aspects of our lives, not least our finances. Recent figures show 30% of us are dipping into our savings to cover living costs.

But it’s not only pandemics you need to prepare for. ‘Normal’ life can also throw unexpected costs at us, like a broken boiler, car repairs, or losing your job. Borrowing to cover these unexpected costs can wreak havoc with your long-term financial security – especially if you don’t pay it off straight away.

It’s better to have an emergency pot of cash instead which can act as a safety net helping cover these unexpected costs.

How big should an emergency fund be?

Financial planners usually suggest between three and six months’ worth of expenses as a starting point. But you might want more than this – especially if you think it would be difficult to rebuild the pot should you need to use it.

If you’re retired, one to three years’ worth is more prudent. But there’s no magic number here – how much you should have is a very personal question and will depend on your circumstances.

What we do know is that you should keep your emergency fund in an easy or instant access account – so you have fast access to your money.

Simple tips to build an emergency fund

1. Start small and get used to the money coming out of your account.
2. Increase it gradually if you’re able to. If you find yourself with spare money at the end of the month, think about topping up your emergency fund.
3. Set the money aside as soon as you’re paid – a Direct Debit could cut out the hassle.
4. Round up other purchases and put the excess into your emergency fund. Small amounts can really add up if they’re done often enough.

Why you may choose to hold more cash

For any known larger costs within the next five years, like a wedding, new car or moving home, you might want to keep more cash available. One option for this cash is to look at a fixed term savings product. They typically pay better rates than easy or instant access accounts.

For example, the average instant access rate is 0.28%, but a one year fix is 0.73% - more than double the interest. These are just averages so you should be able to find much better rates.

But the trade off with fixed term savings is that you won’t usually get access to your money until the product matures. So you shouldn’t put money in them that you think you’ll need before then. For example, if you know you have a big expense due in 12 months’ time, you won’t want to tie your money up in a 2 or 3 year fixed term savings product.

You can usually fix for as little as three months up to five years so you should be able to find something that suits you. Generally, the longer you fix for, the better the rate.

Look beyond the high street

For many savers, their high street bank is the first port of call when choosing savings products. But high street banks typically pay some of the lowest rates – as little as 0.01% on some instant access accounts. If you’ve got £10,000 saved, you’ll only get £1 interest after a whole year.

The only savings account you’ll ever need

Active Savings can help. It lets you choose easy access and fixed term savings products from a range of banks and building societies, all from one online account.

Once you’re set up you can move your money when they mature between products with just a few clicks. No forms and no paperwork.

There are great rates available, such as 0.75% (AER/Gross*) on easy access and 1.35% (AER/Gross) on a one year fix.

This article isn't personal advice, so you need to be comfortable with making your own decisions. Remember inflation reduces the future spending power of money.

Products available through Active Savings can be added or withdrawn at any time. Minimum deposit requirements apply to individual products. Instant access products allow immediate cash withdrawals. Active Savings offer easy access products where withdrawals usually take one working day.

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

Gross means the interest rate without any tax deducted. Interest is paid gross. You’re responsible for paying any tax due on interest that exceeds your Personal Savings Allowance to HM Revenue & Customs. Tax treatment can change.

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