As the last few years have shown, none of us knows what is around the corner. A big expense, a sudden loss of income, accident, economic crisis… Having an emergency fund can help you deal with the unexpected.
Many advisors recommend having the equivalent of 3-6 months of income as cash savings that you can call on in an emergency.
But a cash lump sum sitting doing nothing is a luxury, and with inflation still eating away at the value of savings, its easy to argue that it is a waste of scarce resources.
But could your emergency savings actually make you money?
Interest hikes make saving more worthwhile
The past few years have seen interest on cash so low that stuffing money into your mattress was almost as rewarding as high street savings accounts.
Now, with the Bank of England’s base rate already at its highest level since 2008 and looking to head higher, real returns on cash savings are making a comeback. Higher rates may take time to filter through, there are already some more attractive options for cash savers.
Your cash savings are safe – The Financial Services Compensation Scheme protects balances up to £85,000 with all recognised banks and building societies. If you have more than that in your emergency fund you might want to spread your money across your current accounts and savings to ensure you don’t have more than £85,000 in any one.
If you have cash savings – whether it’s your emergency fund or savings for a short-term goal – you can currently earn up to 5% on cash in an easy access account and as much as 7% from a regular savings account. True, these rates are still below the rate of inflation, but if the Bank of England’s predictions are to be believed, prices will soon stop rising, and that kind of interest on your savings will actually grow your wealth.
But what kind of savings account should you be looking for?
Instant access accounts
Instant access accounts might be the most appropriate for your emergency fund. You can pay in as you like and draw out as you like. Your money will earn interest when it is on deposit, but you need to be aware that it will not earn as much as it would in other types of savings account.
Fixed term accounts
If you’re happy to lock money away for longer, you have the option of two or five year fixed-rate fixed term accounts which might offer a better interest. With most you can get your money out in an emergency, but you will lose any interest you have made on it.
Once a fixed period ends, you just open another account – either with the same bank or elsewhere. But remember if interest rates go up, you will be stuck with the rate you have until the fixed period ends.
Regular savers accounts
Regular savers accounts can be among the best paying high street accounts, and while interest rates are still far from beating current inflation, there are some attractive options out there. You need to commit to regular monthly saving with a minimum amount usually starting around £25.
Cash ISAs have been out of fashion lately, but like conventional savings accounts, they are starting to look more attractive as interest rates rise.
Putting money into an ISA will let you build up a nest egg that the taxman can never touch. You may need to wait a few days to get cash out if you do need it, which might make a Cash ISA less than ideal for your emergency fund – but if you never face that emergency and never call on your fund, it could be the best place for ongoing growth.
Get some help
To discuss the most suitable home for your emergency fund, call us at Continuum. We can identify the accounts with the most suitable rates, and help you plan the most appropriate way for you to help get your emergency fund working for you.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable tax or investment strategy, you should seek independent financial advice before embarking on any course of action.