This month, the Bank of England cut interest rates to 5%, and with the potential for more cuts on the way, it’s made checking in on your savings and making the most of them more important now that it has been for a while.
When you’re checking in on your savings, one of the main questions is always whether you have enough. But to answer it you need to get to grips with an even trickier question: how much is enough?
How much emergency savings should you hold?
When it comes to savings, there’s a fairly simple rule of thumb.
You should have enough cash to cover three to six months’ worth of essential expenses as emergency savings while you’re working.
If you’re retired, you should think about holding more – one to three years’ is sensible.
Of course, to do this you need to work out what counts as an essential expense for your household. You then need to calculate how much you spend on the essentials. And finally you have to decide where on the spectrum of three to six months or one to three years you should fall.
The suggested amount of emergency savings can vary between just under £5,000 and just over £50,000, depending on your age and circumstances.
To make life easier, we’ve done some average calculations. This is no substitute for doing the maths yourself but should give you a steer.
This article isn’t personal advice. If you’re not sure if an action is right for you, ask for advice
We used spending figures from our Savings & Resilience Barometer in July 2024 to calculate what each age group is spending on the essentials, and multiplied it by the number of months they might need to cover.
Of course, what we consider to be essential varies wildly, but the Barometer assumes things like food, medicine, and travel for work are essentials and things like new clothes and spending on recreation and culture are discretionary.
The Barometer shows that on average (mean), households spend £2,058 on essentials each month. So, the cost of three months’ worth of essentials for the average person is £6,174.
Those aged 60 and over have the lowest costs (£1,390 a month) and those in their 40s have the highest ones (£2,349 a month). The cost of three years’ worth of essential spending for someone aged 60 and over is £50,040.
How much do you need to save?
Period of essentials to cover | 20s | 30s | 40s | 50s | 60s and over |
|---|---|---|---|---|---|
3 months | £4,788 | £6,786 | £7,047 | £5,262 | |
6 months | £9,576 | £13,572 | £14,094 | £10,524 | |
1 year | £16,680 | ||||
3 years | £50,040 |
Remember, this is just an illustration to show you how much you could need. It’s not a recommendation of how much to hold as that will depend on your own circumstances.
The Barometer also shows that while we’re working, two thirds of households have enough emergency savings. However, this varies significantly with age.
The younger we are, the more likely we are to fall short – and among all those aged under 35, fewer than two thirds have enough savings. It hits a low between the ages of 20 and 24, when only just under a third hold enough cash.
Where’s the best place for your emergency savings?
The best place for your emergency fund is an easy-access savings account or Cash ISA.
At the moment, you can get interest of close to5% onboth. So, it’s worth checking out online banks and cash savings platforms, like our Active Savings platform, where you tend to find higher rates than branch-based accounts from high street banks.
Savings accounts like Active Savings are designed to make getting better rates much easier.
You’ll find great deals from multiple banking partners and can switch between them in minutes, all through one easy-to-use online account.
Having a rough guide to how much savings you need should help encourage those with a shortfall to revisit their budgets and see if they can afford to put something aside each month.
However, equally it can help savers see where they’re hoarding too much in cash, which comes with problems of its own.
If you find your savings accumulating beyond what you genuinely need, you might want to consider investing some of it instead for the long term (that’s at least five years though).
This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). 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. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).