The savings resilience gap – what is it and what can you do about it?

Almost one in four people with a household income of £100,000 or more worry most days that they don’t have enough in savings to cover emergencies. We usually suggest having between three to six months’ worth of expenditure before retirement and one to three years’ worth after in case anything unexpected happens. What’s more, 12% of households bringing in £150,000 or more couldn’t last a single month on their savings.

Regardless of your usual earning potential, a nasty shock out of the blue has the potential to throw your finances into disarray. Here’s what you can do about it.

Although this article can give you helpful tips around savings, it isn’t personal advice. If you’re not sure what to do please seek advice.

Reasons for the resilience gap

There are likely to be several reasons for the savings resilience gap among higher earners. Some of it is because expenses tend to expand to fill the cash available, so there’s nothing left to put aside for emergencies. For example, you might live in a property with a large mortgage, have children at private school, and pay for a high-end car. All these things could feel like necessities you can’t scale back in order to free up cash for emergencies.

Those who earn more might also be more comfortable going into debt to cover emergencies, because it will take less time to pay it off if their income holds up. Our previous research showed that the more people earned, the more likely they were to overspend each month.

And this can have a knock-on effect into retirement, where available cash might not always be guaranteed. Unless you’re on a high guaranteed pension, you can’t always rely on a set income at this level. If you were to lose income, or fall ill and be unable to work, you could be much less comfortable with this level of debt in the future. One way to soften any blows is by making sure you have income or sickness protection in place in case the unexpected does happen.

There’s also the potential risk that higher earners might not have thought through how much money would be needed to cover an emergency, and just plumped for a specific sum that ‘feels right’. They might settle on a figure like £5,000 and think that holding this will cover them.

How much do you actually need?

In reality the right level of savings you’ll need to cover an emergency is more like between three and six months’ worth of essential expenses. If you’re retired, you’ll need more – we think one to three years is sensible.

The first step is to work out what that means for you. You should start by working out which expenses are essential. It’s not necessarily just about keeping a roof over your head and paying the bills, there might also be a number of other regular payments you have to keep up. This will give you an idea of what you need to cover every month.

Then you need to think about where on the spectrum of three to six months’ worth of expenses you should sit. This will depend on how much security you need in order to feel comfortable.

For example, you should consider your employment situation – whether your income varies, if your job is at risk, and how long you’d expect it to take to find work again. You also need to think about your vulnerability, which includes things like your health, your caring responsibilities, and the health of those you’re responsible for.

If you have higher earnings and outgoings, and are at reasonably high risk, it’s not impossible to find yourself needing to have more cash savings. You might baulk at holding a lot in cash, especially while interest rates are so low. You might even think it’s a waste to keep that much in cash earning next to no interest and want to invest it to make it work harder. However, this probably isn’t the best approach to something that should be essentially risk-free.

If you have the assets available, but in investments rather than cash, you risk having to withdraw money from your portfolio at completely the wrong time. Having to pull the money out when the market’s dipped could mean selling at a loss.

To work effectively, investments need to be planned over the long term – rather than risking being cashed in every time life throws us a curveball. The only sensible home for emergency savings is an account where it’s easily accessible.

What can you do?

The aim will be to establish your safety net as quickly as possible.

If you have money in other assets, you can plan for the most sensible way to transfer the sum you need into cash.

If you receive lump sums during the year, you can allocate this to your emergency savings. So, things like bonuses or the proceeds from share schemes can be used to build your resilience. Otherwise you’ll need to build your savings more gradually.

It can feel like needless admin, but by far the most effective approach is to start with a budget. Think about making a list of everything you have coming in and everything you spend in a month. That way you’ll easily spot the spending you can live without, whether that’s bills you’re paying too much for or luxuries you don’t ‘need’. It’s only if you go through the list and can’t find a single thing you don’t get enough value from that you might need to think about sacrifices.

Once you’ve worked out what you can free up, you could think about setting up a direct debit to transfer this into a savings account the day after payday each month. By paying yourself first, you avoid the temptation to simply spend the money elsewhere.

Finally, you should think about where you’re keeping your emergency savings. It has to be easy to access. But don’t let it languish in a high street account, where you’ll typically earn 0.01% on your savings. Why not think about newer and smaller banks, which offer the same protections as the high street, but far more interest?

You could even think about putting it into an online cash savings platform like Active Savings to help your money grow. You can choose a variety of different cash savings products from different banks and building societies, all through one online account. So you can reach your savings goals at a rate that’s right for you. It’s also important to remember that inflation reduces the future spending power of cash.

If you hold investments with us too, you’ll also be able to see all your savings and investments in one place

Keep in mind, high street banks offer instant access accounts which allow immediate access to your money. Active Savings offers easy access savings so withdrawals usually take one working day.

Your emergency fund is never going to be the most exciting part of your portfolio. But if life takes a turn for the unexpected, and you end up needing to fall back on it, at that moment, it will become the most valuable asset you have.

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.