Rainy-day savings accounts

Why you need to save for a rainy day

Unexpected events like job loss or a reduction in income can happen to anyone, with little notice. The recent rise in inflation and interest rates have been a considerable shock for many, too. For those with rainy day savings, the impact can be less severe.

It’s not just about losing your job; having a rainy-day fund can help with life’s emergencies.

An emergency fund can also cover unexpected expenses for happy occasions – like buying a new wedding outfit or paying for a school trip for the kids.

How much have people saved?

According to the Precautionary Tales report, published in February 2024, a third of working-age families don’t have at least £1,000 in savings. The January 2024 Financial Lives Recontact survey by the Financial Conduct Authority (FCA) found that 44% had stopped or reduced saving to make ends meet, while 23% were using their savings for everyday expenses.

A different report from the FCA, the most recent Cash Savings Market Review, found:

Between them, consumers hold £1.5 trillion in savings accounts

• 75% (of consumers) use their main current account provider for their savings account

• 23% had switched to get a better interest rate

• 30% of adults don’t have any savings accounts (an increase from 24% in 2020)

Meanwhile, official government statistics published in 2023 show:

• 11.8 million adult ISA accounts were subscribed to in 2021 to 2022, down from 12.2 million the previous financial year

• The number of cash ISAs subscribed to decreased by 920,000 in 2021 to 2022

• The number of stocks and shares ISAs subscribed to increased by 345,000

Experts recommend having enough money to cover three months’ worth of essential outgoings in an instant access savings account, instead of investing it, so you can get your hands on the money straight away if you need it. This figure will vary from person to person, so it’s important to decide on a figure that is right for your personal situation.

How to start your emergency savings fund

Look at your existing finances

Before you start your emergency savings fund, it’s sensible to assess your financial situation. Are there any debts (such as credit card bills, overdrafts or loans) you need to pay before you save? If so, it could cost less to clear those first.

Work out a savings goal

As mentioned above, experts recommend having enough money to cover three months’ worth of essential outgoings. Having a goal in mind can motivate you, and it’s encouraging to see the number grow over time as you save more.

Compare instant-access savings accounts before you open one

If you’re keeping up with your bills and credit card payments then it’s time to start thinking about those rainy-day savings. You have to start somewhere, even if it’s just putting a few pounds into a savings account every month. If you’re lucky enough to receive a one-off lump sum, such as a tax rebate, then you could put some of it towards starting your fund.

Instant access accounts are the best 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 may even be able to earn some interest, too.

But with interest rates having risen sharply in recent years, it makes sense to check out details of the accounts to ensure the deal is as good as it seems. There are some notice savings accounts that pay just a little more but have conditions – such as being able to only make a set number of withdrawals in a year.

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.

Save regularly

Even better, get into the savings habit by putting aside money regularly. To work out how much you can afford to save, list out all the expenses you need to cover every month, like rent, bills and groceries, then look at your bank statements to figure out what else you spend money on. Some of what’s left over can then be saved each month.

You could set up a standing order to your savings account, with the money going out on pay day so you don’t even miss it. If you receive a consistent income, you could even check if your employer will pay this amount into your savings account directly.

Top up your account

You can also look at how much money you have left at the end of the month and top up your savings account once all your expenses have been paid. Some bank accounts will sweep your ‘surplus money’ into a savings account automatically. This can also be a way of topping up your emergency fund until you’ve reached your savings goal.

If you’re saving regularly

Compare accounts

As well as checking out instant access accounts to see which are paying the most interest, it’s also worth looking at what regular saver accounts are paying.

Often banks and building societies will have a regular saver account where you can save a maximum every month, typically around £200-£300. These pay a much higher rate of interest than an instant access account. Typically, some of the best-paying accounts are only offered to customers with a current account with that bank. See what your existing bank is offering. If the interest is worth it, you could think about switching.

Regular saver accounts may also have other strict conditions which you need to know before you sign up for one. These can include:

• a requirement to pay in every month

• a limited number of withdrawals allowed each year

Check your progress

In the digital age, there are plenty of ways you can keep an eye on your savings account. Many providers have their own secure apps, or you could use a separate budgeting app and cover all your finances in one. You could also keep track manually by using a spreadsheet or even pen and paper — whatever works best for you.

Review your emergency fund

Finances can shift over time, and this may affect how much you contribute towards your emergency fund. For example, if you receive a pay rise you may start to spend more each month, which means your emergency fund figure will need to be larger, too. Review your savings goal every time your financial circumstances change.

Find small ways to save

Little changes can soon add up after a few weeks. Here are some suggestions:

• Make coffee at home and take it with you in a flask, instead of buying it.

• Choose ‘wonky’ fruit and veg at the supermarket. They cost less but taste exactly the same as their regular counterparts.

• Use family subscriptions for entertainment services – although they cost more each month, it can often be cheaper than having lots of individual accounts.

• Cancel subscriptions you don’t use or need.

• Look for discount codes before you buy anything online. You can download add-ons for your browser which find the codes for you.

• Install a cashback app. You can get a small percentage of your total spend paid back, which adds up over time. You could withdraw your cashback to your savings account if you like.

• Unplug appliances when they’re not being used and save on your electricity bill.

Reaching your rainy day target

Having enough money saved to cover three months of outgoings should be the minimum target for your emergency fund. But you might want to aim to save up to six months’ worth of outgoings to give you an extra buffer.

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, or top up your pension or invest to increase your wealth.

It’s also worth remembering to make sure all your savings are protected by the Financial Services Compensation Scheme.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.