At a glance
Rainy-day savings can be a lifeline if you lose your job, are unable to work due to illness, or are faced with a big unexpected bill.
You should ideally aim to have 3-6 months' worth of income set aside in an emergency savings pot.
Instant-access accounts let you withdraw money without giving notice.
If you're paying interest on debt (e.g. a credit card), it could be worth paying this off first and building savings after.
Why you need to save for a rainy day
Out of the blue or with little notice, life’s emergencies can happen to anyone.
A serious setback such as a job loss or illness, or urgent repairs to your home or car, can land you with bills that are tough to cover.
The cost of living crisis combined with high inflation has also stretched household budgets, leaving many struggling to stay on top of their finances.
By having a decent 'rainy day' savings pot, though, the impact can be less severe.
Did you know?
In the 12 months to January 2024, nearly a quarter (23%) of adults used savings or sold their investments to cover day-to-day expenses – all to make ends meet, according to the Financial Conduct Authority’s Financial Lives Survey.
How much should you have in emergency savings?
Financial experts recommend having enough money to cover three to six months' worth of essential outgoings in an instant-access savings account, so you can get your hands on the money straightaway. This gives you time to find a new job if you lose yours, for example.
Yet less than half of working-age families have three months' worth of income set aside, according to the Resolution Foundation. And one in three working-age families – rising to almost half of low-income families – have less than £1,000 saved up.
If you’ve got £1,000 in savings, it can usually help deal with costs such as broken washing machines or car repairs. But you’ll need to build up a much larger sum to cope with bigger life events, such as unemployment or family breakdown.
So what should you do to give yourself a buffer against financial shock?
Start your emergency savings fund
When it comes to setting up your emergency fund, the most important part is to simply start - even if you just put a few pounds into a savings account.
Even better, try to get into the savings habit by putting money aside regularly. You could set up a standing order or direct debit to a regular savings account, with the money going out on pay day so you don’t even miss it. As little as a few pounds every month adds up over time, and is more than you would've had if you hadn’t started saving.
And if you have any money left over at the end of the month, you could use this to top up your savings account with a little more. Some bank accounts offer to automatically sweep your ‘surplus money’ into a savings account. This can help you reach your savings goal more quickly.
Top tip
Set yourself a few ground rules about what counts as an emergency, to help avoid the temptation of dipping into your rainy day fund for costs that aren't truly urgent. Many banks also let you name your accounts – e.g. ‘My emergency fund’ - which can help you focus on what it’s really there for.
Choose the right savings account for your emergency fund
There are three main types of savings accounts:
Easy access accounts where you can get your hands on your money easily
Fixed-term accounts where you lock your money away for a set period of time, usually between one and five years
Notice savings accounts where you need to give the bank or building society notice that you want to withdraw your money.
Fixed-term and notice savings accounts are not generally well suited to emergency funds, as you’ll pay a penalty or have to wait for your money if you want access before the set period is up.
Instant-access accounts
Instant-access accounts are usually a good fit for emergency savings. Your money won’t be in your current account tempting you to spend it. And it won’t be locked away for a set period in a fixed-rate account. You should be able to earn some interest on it, too.
You can open some accounts with just £1. Many accounts can be managed entirely online, while others can be opened in a branch or by post.
Regular savings
These allow you to save a maximum every month, usually around £200-£300 and tend to pay higher rates of interest than instant-access accounts.
Some of the best regular savers are only available to people who have a current account with that bank. It could be worth switching your current account so you can take advantage.
Regular saver accounts may also have other strict conditions which you need to know before you sign up. These can include:
A requirement to pay in every month
A limited number of withdrawals allowed each year.
Cash ISA
A cash ISA allows you to save up to £20,000 a year without paying any tax on the interest you earn. Unlike standard savings accounts, the interest on a cash ISA is always tax-free, regardless of much you earn.
You can find cash ISAs with easy access, as well as fixed-term options if you’re willing to lock away some of your money for a set period.
Standard savings accounts, by contrast, are subject to income tax once the amount of interest you earn is greater than your Personal Savings Allowance (PSA). The PSA allows:
Basic rate taxpayers to earn up to £1,000 in interest tax-free
Higher-rate taxpayers to earn up to £500
Additional-rate taxpayers to have no PSA
For many, particularly basic-rate taxpayers, it takes a significant amount of savings to exceed the PSA.
This means money in a rainy day fund held in a regular savings account could be completely tax-free.
However, if your total savings interest across all your accounts is likely to exceed your PSA, or you’re a higher- or additional-rate taxpayer, a cash ISA can help protect your interest from tax.
Reaching your rainy day target
Aim to save enough money to cover three months of essential bills as a minimum – ideally, see if you can put aside enough for six months.
Once you’ve reached your target, you’ll be in the enviable position of thinking about what to do next to secure your financial future. You might want to put your extra savings into an account that pays more in interest, top up your pension or invest to increase your wealth.
If you have enough put by, check to make sure all your savings are protected by the Financial Services Compensation Scheme.
Review and top up your emergency fund
If you need to use your emergency fund, it’s a good idea to top it up when you can so it’s ready for the next emergency.
It’s also sensible to regularly reassess how much money you need to keep in it. For example, if your mortgage or rent payments rise, your emergency savings may no longer be enough and could need a boost.
Pay off debt first
While it’s a really good idea to create an emergency fund, be sure to make the best use of your money before you start putting it away for rainy days.
If you have debts that are accruing interest – on credit cards, for example – it can be cheaper to clear these first, as what you pay in interest is likely to be more than you’ll earn on your savings.
Other alternatives
You could also consider income protection insurance, which can pay out if you’re unable to work or lose your job. Policies vary so always check the terms before signing up.
Looking for something else?
As well as writing for Churchill and Privilege insurance websites, Karen’s CV includes working with M&S, Debenhams, Tesco, Sainsbury’s and John Lewis. With over 20 years of editorial experience for big household names she leads a talented content team with a focus on simplifying personal finance for everybody.
Ele Clark is an award-winning editor who has held leadership roles at Which? and news-stand publications in London and Dubai. She’s appeared across the press and media, including BBC’s Panorama. With almost 20 years’ experience in personal finance, insurance and consumer journalism, she leads a talented team at Compare the Market, creating insightful, accessible content to help people make informed financial decisions.
Sajni is passionate about finding money products to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.
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