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Savings accounts: how big should your rainy day fund be?

We explore how to build an emergency fund, how big it should be and a simple way to get it working harder for you.

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.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

When we save we usually have something in mind for it. Maybe it’s a new car, a wedding or improvements to the house. But everyone needs cash for emergencies, so you shouldn’t overlook a rainy day fund.

However, our recent survey* suggests one in four people don’t have any cash savings at all. For one in five who do have cash savings, it wouldn’t last longer than a month if they didn’t have any income.

An emergency pot could protect you from unexpected events like a broken boiler or unexpected car repairs. Putting money aside for things like this gives you breathing room.

The best way to build up a rainy day fund is to start now. Putting away what you can afford every month. Get yourself in to a routine, and the small amounts can really start to add up. In under a year, just £3 a day adds up to over £1,000.

*2,001 respondents, September 2019.

How big should the emergency fund be?

As a starting point, our financial planners typically suggest that we need three to six months’ worth of expenses as a rainy day fund.

But everyone’s circumstances are different. We think you should keep more cash on hand if you’re in retirement. If your disposable income isn’t as high as it was when you were working it might make it a bit harder to bounce back after that boiler breaks down.

An important thing to keep in mind is to hold it in an easily accessible savings account so if the time comes you have quick access to your money.

If you’re saving for something specific, you’ll probably want to have more as well. You might even want to keep this pot separate so you know where you stand, and you’re not tempted to eat into your emergency fund.

Building a savings portfolio

Start by thinking about your goals. Are they short, medium or long term?

Once you have your rainy day fund covered, you could look at fixed term savings for any other expenses that you know are coming up. They tend to provide better interest rates than easy or instant access accounts, which means you can get your pot working harder. Although please bear in mind that with fixed term savings you usually won’t have access to your money until the end of the term.

You can typically fix from just three months up to five years so you can choose a term that works for you. For example if you know you need to pay for something in six months’ time you could choose a six month fixed term product.

If you have a little more flexibility you could consider blending fixed term products of different lengths, to ensure you get regular access to some of your money. Here’s an example of how it could look:

How a £10,000 pot could be split

Scroll across to see the full chart.

Keep it as busy as you are

Once you’ve built your pot you’ll want to make sure it’s working hard for you and earning a good return. In the past this could have meant going from bank to bank to get competitive rates – having to go through application forms and proving your identity time and time again. Not many of us have the time for that.

Thankfully there’s an easier way.

Active Savings, our savings service, lets you pick and mix easy access and fixed term savings products from a range of different banks and building societies through one online account. Once you’re set up you can choose as many savings products as you like and there are no more applications to complete.

And since it’s all managed through one online account, it’s easy to keep track of all your savings, even if they’re with multiple banking partners.

There are great rates to choose from, with 1.20% (AER/Gross**) on easy access and up to 1.41 (AER/Gross**) on a 1 year fix. Rates correct as at 2 March 2020. Products can be withdrawn at any time without notice.

Not only could Active Savings help you build your rainy day fund, but it could help maximise your whole savings portfolio, while keeping it easy to manage. It could change the way you save.

More on Active Savings

See our latest savings rates

This article isn't personal advice, but could help you make your own decisions so you can make more of your money. If you are unsure, please ask for advice. Inflation reduces the future spending power of money.

Withdrawals from Active Savings usually take one working day. Easy access products pay a variable rate and fixed products pay a fixed rate. Minimum deposit requirements apply to individual products.

**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 are responsible for paying any tax due on interest that exceeds your Personal Savings Allowance to HM Revenue & Customs. Tax treatment can change.

Expected profit rate – Islamic banks offer an expected profit rate, rather than interest on their savings products, in order to comply with Sharia banking principles.

This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248. 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 Payment Services Regulations 2017 with firm reference 751996 for the provision of payment services. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).

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.

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