So who’s got emergency savings? And no, I don’t mean a few coins down the back of the sofa.
Why bother with emergency savings?
Emergency savings are vital. An emergency fund rides to the rescue if the boiler blows up, the car breaks down or your job disappears (and Sod’s Law states all three are bound to happen at the same time).
Use savings, rather than borrowing money, and you’ll avoid expensive interest on credit cards and overdrafts, or the tricky dynamics when borrowing from family or friends.
I’d always rather get paid interest on savings, than pay someone else to borrow their money. Plus, I’m keen to hang on to my nearest and dearest. So emergency savings are A Good Thing.
How much do I need in emergency savings?
In their wisdom, financial experts recommend stashing away three to six months’ of living expenses.
So if your bills and spending come to say £1,500 a month, that adds up to between £4,500 and £6,000.
Woah. That’s a whole heap of cash, especially when a shockingly high proportion of people don’t even have £100 to their name. (Previous post)
But think about it – if your salary stopped, would you just walk into a new job the next day? I find enormous peace of mind knowing that if our income vanished, we’ve got the savings to keep a roof over our heads.
If three to six months’ living expenses seems utterly impossible, remember even smaller amounts will help. Dave Ramsey, the US evangelical debt basher, for example, suggests saving £1,000 as an emergency fund before paying down debt. Better to start somewhere.
What kind of account is best for emergency savings?
The whole point of emergency savings is that you can get hold of the money in an actual emergency, so that affects what account to use. Interest rates may be rubbish right now, but I still like to make the most of my money.
Here’s what I look out for:
- Keep it in cash. I bang on about investing in the stockmarket to grow your money in the long term. (Previous post) But for money in a hurry? Cash is king. You never want to be in the position where you need your emergency money RIGHT NOW but the value has plummeted after a stock market fall.
- Choose the right account. Avoid bank accounts with restrictions on withdrawals. Think easy access, so you can whip your money out PDQ, rather than notice accounts or fixed-term bonds.
- Go online. With internet banking, you can transfer cash without waiting for branches to open, or telephone banking to start.
- Earn interest. If you’ve got money stuck in cash, make sure you’re earning as much interest as possible. Look for the highest interest rates where your money is still accessible. I check the best buy tables from Savings Champion and Moneyfacts
- Consider current accounts. Surprise! You may find higher interest rates on current accounts than savings accounts. Yes, it’s more effort at the start, meeting the small print by setting up monthly payments into the account and direct debits. (Previous post) But once set up, it should take care of itself, while you sit back and earn extra interest. Best to open a separate account for emergency savings, rather than risk temptation if you can see them in your everyday current account.
- Be prepared to open several accounts. Several of the highest interest rates are only paid on limited amounts of money. If you want to earn as much interest as possible, spread your emergency savings across several accounts.
- Take advantage of tax breaks. You don’t even have to use a individual savings account (Isa) to stop the taxman taking a cut of your emergency savings. If you’re a basic-rate taxpayer, you can earn up to £1,000 a year in interest without paying a penny in tax – it’s known as the Personal Savings Allowance. Higher-rate taxpayers can earn £500 interest a year, tax-free. So even if you could find an account paying a stonking 5% a year (hint: unlikely), a basic rate taxpayer would need a balance bigger than £20,000 before they went over their Personal Savings Allowance.
- Review rates in future. Banks have a nasty tendency to lure you in on a high rate, than whip it away later. Meanwhile new accounts appear with rates to tempt new customers. So every so often, check if your emergency savings are still earning tip top interest, and consider switching if not. Doesn’t have to be a big deal – maybe once a year?
Where to stash emergency cash?
The launch of a new savings account this week prompted me to juggle my emergency money around.
Here’s where I reckon I can earn the most interest:
- Getting started? Try Chip, the automatic savings app. Refer friends, and you can earn up to 5% interest on up to £10,000. However, that balance will take a long time to build: Chip works out what you can afford to save and transfers small amount every few days. You can only make limited transfers yourself – up to £100 no more than six times a month. So it’s a great way to start stashing cash, but you can’t just bung in £10,000, should you have it. (Check my review of Chip and use code 4T0C9I to start on 1% interest)
- Highest interest current accounts Good rates on limited amounts, but make sure you meet conditions about how much you pay in each month, and how many direct debits go out. Highest rates available as of 29 Sept 2018 will cover £7,000 in emergency savings:
- 4.89% on up to £2,500: Nationwide Flex Direct current account. Careful though, because the rate drops to 1% after a year.
- 4.89% on up to £1,500: TSB Classic Plus current account. Still high after all their internet banking hassles.
- 2.96% on up to £3,000: Tesco Bank current account, although sadly this rate will be cut to less than 1% from 14 June 2019.
- Highest interest easy access account Never thought I’d get so excited about 1.49% interest, but Goldman Sachs, the big investment bank, has just launched an offshoot called Marcus. It offers a super simple internet account, which pays a market-leading 1.49% a year on £1 up to a whopping £250,000, and you can whip your money in and out as often as you fancy. This means you don’t have to faff around with other current accounts that pay the same interest with more restrictions (*cough* Santander 123, Club Lloyds, Bank of Scotland Vantage). Yes, the rate includes a 0.15 percentage point bonus for a year, but afterwards you can renew your bonus and opt in to whatever rate they’re paying then. As someone who’s a bit wary of brand new start ups, I’m glad Marcus is backed by such a long-established bank.
So I reckon a combination of Chip, current accounts and a Marcus account will make the most of my emergency cash.
Now – over to you. Do you have any emergency savings? Ever found them useful? Do share in the comments, I’d love to hear!
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