Having a rainy day fund can help protect you and your family against those expenses that have a habit of cropping up unexpectedly.
When you don’t have something exciting to save for, such as a wedding, holiday or house deposit, it can be hard to motivate yourself to squirrel money away. But having a rainy day fund can help protect you and your family against those expenses that have a habit of cropping up unexpectedly, such as the car breaking down or the central heating packing up.
As a rule of thumb, you should look to have between three and six months’ of essential expenditure squirrelled away in a rainy-day fund. This cushion should be enough to cover most short-term scenarios.
One of the best ways to build this financial buffer is by setting up a monthly direct debit to go from your current account into a savings account the day after payday. That way, you will barely notice the money leaving your day-to-day spending fund.
So what sort of account should you choose? A good starting point is a cash individual savings account (ISA), as all interest is tax-free; the current limit is £15,000 a year. But make sure the ISA you choose offers instant access, as you never know when you might need to get your hands on your money.
Another option is a regular saver into which you deposit a specified amount each month. But note that these accounts do not offer any tax benefits, and can also come with Ts and Cs – so make sure you read the small print.
When starting to save, no matter whether for the short, medium or long-term, don’t forget to think about how safe your money is. The good news is, that if you are squirreling your hard-earned cash into an account with a bank or building society that is UK-regulated, it will be protected up to £85,000 (per person, per institution) by the Financial Services Compensation Scheme.
Finally, while interest rates may be at historic lows at the moment, it’s important not to give up on saving, as rates will pick up at some point. By building up a decent balance now, you will be in a great position to benefit when they eventually do. To find out how much you could save each month, try out our Savings Calculator.
This Money Matters post aims to be informative and engaging. Though it may include tips and information, it does not constitute advice and should not be used as a basis for any financial decisions. Sainsbury's Bank accepts no responsibility for the opinions and views of external contributors and the content of external websites included within this post. Some links may take you to another Sainsbury's Bank page. All information in this post was correct at date of publication.