Having an emergency savings fund to take care of life’s unforeseen little hiccups is a good idea – but what’s the ideal amount to keep back for a rainy day?
There’s a general consensus that it’s good to have emergency savings. However, it is not always clear how much you really need, or what even constitutes an emergency.
How much should I save?
Your savings should be enough to cover more than just a boiler repair. As a general rule, the Money Advice Service suggests your emergency fund should be enough to cover all your essential costs for at least three months. If you can’t work and have to take time to get back on your feet you’ll need this safety net to fall back on. Calculate how much you really need to live on, including mortgage payments or rent, bills, food and travel. However much you come up with, multiply it by three and make that amount your savings goal.
Start building up your savings fund by regularly putting away as much as you can afford. A good way to keep disciplined is to set up a standing order which transfers money into a savings account on payday. Savings accounts are quick and easy to set up; many banks even allow you open an account online.
How much is too much?
Having your money in a savings account means it’s immediately accessible in case of an emergency. However, the trade-off for this ease of access is often poor interest rates. This means that by having more money than you need in emergency savings, you could be missing out on higher returns from other savings and investment options. If you have more than six months’ worth of emergency cash then you may want to consider investing as an addition to your savings plans.
What counts as an emergency?
Having built up an emergency fund, don’t be tempted to spend it on ‘emergency’ outgoings that are actually not too crucial. The most obvious reason that you would need to go into your savings is a gap in employment. If you lose your job and can’t find another one straight away, or if you decide to leave without having your next role lined up, having emergency savings will help you sleep at night.
Other unforeseen essential costs can necessitate dipping into your emergency fund. If your car needs repairs or your boiler breaks in winter, you will probably need to get it fixed immediately. In these situations, it is better to spend your emergency cash and avoid going into debt.
Once life is back to normal and your incomings and outgoings have levelled out, you can start building your savings back up again. You’ll be even more motivated to save, having experienced just how useful spare cash can be.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.
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Lisa Caplan
Lisa Caplan is head of financial advice at Nutmeg. She combines her wide experience of developing brands for blue chip companies with eight years as a chartered financial planner delivering financial advice to a range of people at different stages of their lives.Other posts by Lisa Caplan