Save a penny for a rainy day

Bad luck has a habit of striking when we least expect it, and usually at the worst possible time. Whether that’s your boiler packing in or the engine light on your car’s dashboard flashing red – the cost of dealing with these bumps in the road all add up.

While it’s impossible to predict when these types of events will happen, they inevitably will. So, it makes sense to get ahead of the game by building up your rainy-day savings pot – a cash buffer for unexpected emergencies.

This is the third article in a five-part series – 5 to Thrive – a step-by-step guide to help you succeed in building the foundations to a strong and resilient financial future.

Here we’ll give you information on the importance of building your cash savings, but it isn’t personal advice. If you’re not sure of the best course of action for you, please ask for professional financial advice.

Rainy-day savings explained

A rainy-day savings pot is money you’ve saved to cover any unplanned emergencies.

This helps protect you against any income shocks like job losses or spending shocks – things like repairs to your car or household appliances.

The last few years have highlighted the importance of cash.

Despite having less disposable income than before the start of the pandemic, lots of households have tightened their belts and improved the health of their finances.

On average, 64.8% of households currently have a good level of rainy-day savings compared to 47.3% before the pandemic.

Your rainy-day savings pot isn’t the same as the one you dip into for your summer getaway or to do some retail therapy. They can be planned for, so they should be kept separate.

Where should I keep my rainy-day money?

Your emergency savings should be kept within touching distance. By that, we mean in a savings account you can quickly and easily withdraw from.

Instant or easy access savings accounts are the best option for this. Withdrawals are immediate for instant access and usually take one working day for easy access.

Keeping your rainy-day savings as cash also avoids having to sell your investments at a market low point or taking out credit to cover your expenses.

How to manage your debt levels

Cash held in your rainy-day savings isn’t there to build your wealth. It’s there to build up your financial resilience against any unexpected shocks.

The most popular place to save is usually a bank, but you could get a better rate from shopping around.

Inflation can have a big impact on your savings. If the rate of inflation is higher than your interest rate, your money will start losing its value over time.

For example, if the rate of inflation is 5% over one year, and you have £10,000 earning 1%, your money will be worth £9,600 at the end of the year. That's £400 lost. A cash savings platform like HL’s Active Savings can help (more on this later).

It’s important to know how your savings are protected. As long as your money is held with an authorised bank or building society, all eligible deposits will be covered up to £85,000 by the Financial Services Compensation Scheme (FSCS). You can find out more on the FSCS’ website.

How much should I save for a rainy day?

There’s no magic number. The amount you hold as cash will vary and depends on your circumstances and lifestyle.

We think around three to six months’ worth of essential expenses held as cash to cover emergencies is about right.

If you’re retired, you should hold one to three years’ worth of essential expenses. For those in drawdown, consider erring on the side of caution by having the full three years’ worth of essential expenses.

Holding more when you’re retired is a good idea because if you need to dip into your rainy-day savings, it could be harder to replenish.

More on how much cash you should hold

Understanding your outgoings

Getting to grips with the different types of expenses helps you understand how much cash you’ll need.

Expenses can broadly be split into three categories – essential, comfortable and non-essential. Of course, we all differ in how we define this. But here are some examples to get you started.

Different types of outgoings

Scroll across to see the full table.

Ultimately, the lifestyle you might want to maintain will dictate the level of cash you need to keep tucked away. There’s no right or wrong answer to this, but we think you should at the very least have the ‘essentials’ covered.

One more thing

Any planned spending coming up over the next five years that isn’t covered by your income should be held as cash. Things like home improvements or a wedding.

If you’re holding cash for known future expenses, you have the opportunity to tie it up for a while in exchange for a fixed higher interest rate.

The trade-off for a higher rate is that you can’t usually access your money until the term ends. Fixed term products usually range between 6 months and five years, but they can have different minimum balances so it’s worth double checking before making your choices.

Need a home for your cash savings?

Active Savings lets you pick and mix savings products from a range of banks and building societies, all through one online account.

Easy access products mean you can move your money out whenever you like – it usually takes one working day. Ideal for your rainy-day savings.

Once you’re set up there’s no more paperwork or hassle when choosing savings products – no more application forms or proving who you are every time. Just a selection of products with great rates all under one roof.

Find out more about Active Savings

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.