How much do I need to save for a rainy day?
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This year has been a challenging one for many people, but my partner and I have been lucky that we can work from home and have stayed well. However, it’s made us think about the vulnerability of our financial position. The first thing we want to do is to set aside an emergency fund in case we hit difficult times – a rainy day fund. How much do you suggest we put in it and where should we hold it – in a bank current account so we can get at it quickly?
Douglas Bridges of Smith & Pinching responds:
It is certainly a good idea to have an emergency fund that will support you if you hit a bump in the road. Having money where you can access it quickly and without penalty is an important element of your financial plan – but it doesn’t mean you have to keep large amounts in current accounts.
Cash investments such as bank and building society savings accounts, Cash ISAs, NS&I accounts and bonds provide returns by way of interest and won’t be affected by stock market performance: it may be worth looking at investing some of your savings in this way. However, it’s important to bear in mind that fixed term accounts (which may offer better interest rates) don’t allow you to withdraw your money before the end of the term without a penalty.
How much to put aside is a subjective question. As a rule of thumb, we usually recommend that clients have access to savings to cover at least three months’ expenditure. That would allow you to plan to access any other investments in a managed way if needed.
The other thing you might like to look at is to take out insurance cover for scenarios where you are unable to bring in your usual income such as ill health or redundancy. Income protection plans would provide you with essential support if something were to happen. However, it is important to understand what is and is not covered by the policy.
My best advice to you is to get advice from an independent financial adviser and talk through a range of scenarios based on your actual financial circumstances. We use lifetime cashflow planning tools to show you how your planning will be impacted by different scenarios, including family emergencies. You can then begin to understand how much you might need to put aside and where you are most vulnerable. This will enable you to build a plan that is flexible so that you can easily cope with whatever life throws at you.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information visit www.smith-pinching.co.uk
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