Navigating life’s twists and turns without jeopardising your financial stability
Life is full of surprises, and not all come with a price tag that you can easily manage. Whether it’s an unexpected car repair or a sudden home emergency, having a readily accessible financial safety net can make a significant difference. This is where an emergency fund becomes invaluable, providing you with the peace of mind to navigate life’s twists and turns without jeopardising your financial stability.
But how much should you aim to set aside? The answer depends on your circumstances. Factors such as the stability of your employment, ongoing expenses and the potential for unexpected costs will influence your target amount. A general guideline is to maintain an emergency fund that covers three to six months’ worth of essential expenses, including rent or mortgage payments, utility bills, travel and food costs. This cushion ensures that you can navigate difficult times, such as unemployment or ill health, with greater ease.
Preparing for the unforeseen with assurance
Establishing an emergency fund is merely the starting point. Once you’ve achieved this, shifting your focus to long-term savings goals can help you grow your wealth and pursue future aspirations. A long-term savings account is a sensible next step, as it typically offers higher interest rates compared to an instant-access account. When selecting an account, consider your financial objectives and how soon you might need access to your funds.
There are several savings accounts to consider. Easy-access accounts allow you to withdraw your money whenever needed, while notice accounts require prior notice before you can access your funds. Fixed-term accounts, on the other hand, lock away your money for a specific duration but often offer the highest interest rates. For instance, a fixed account might be suitable for planned expenses such as school fees or purchasing a new car in a few years’ time. However, it is not the ideal choice for emergency funds or short-term needs.
Benefits of maintaining organised savings
Managing multiple accounts can provide clarity and flexibility in achieving your financial goals. By categorising your savings into distinct areas, such as emergency funds, holiday savings and a house deposit, you will find it easier to stay organised and resist the temptation to spend money designated for specific purposes. This method also enables you to maximise the interest you earn while maintaining financial flexibility.
For many individuals, a mix of various accounts is the ideal strategy. For example, maintaining your emergency fund in an easily accessible account guarantees quick access when needed, while placing other funds in fixed-rate accounts enables you to benefit from higher interest rates. This balanced approach is particularly beneficial in today’s climate, where average savings rates are increasing, making it more essential than ever to actively manage your cash.
Maximising the benefits of competitive savings rates
Savings rates currently vary significantly, making it essential to ensure that every penny works as hard as possible for you. Many banks entice customers with attractive rates, only to reduce them later, which can result in your money earning far less than it should. Fixed rate accounts often revert to lower-interest easy access accounts once their term concludes, unless you actively transfer your funds elsewhere.
To avoid missing out, take a more proactive approach to managing your savings. Online savings marketplaces allow you to explore a diverse array of competitive accounts and switch between them with ease. By doing so, you can react to fluctuations in interest rates and ensure you’re consistently earning the best return.
Safeguarding your savings and comprehending coverage limits
If you are fortunate enough to have substantial cash savings, it is crucial to understand how to safeguard them. The Financial Services Compensation Scheme (FSCS) covers up to £85,000 per person or £170,000 for couples at any single UK-regulated financial institution. However, this limit applies per institution, not per account.
For instance, Halifax and the Bank of Scotland are owned by Lloyds Banking Group and operate under a single licence. This implies that the total amount of your savings across both brands cannot exceed £85,000 per individual under FSCS protection. Conversely, RBS and NatWest, while part of the NatWest Group, operate under separate licences with their own £85,000 limits. If you wish to save beyond this threshold, distributing your funds across different institutions will ensure that all of it remains safeguarded.
When and how to think about investing
While holding cash is essential for emergencies and short-term goals, it shouldn’t dominate your financial strategy. This is because excessive cash savings may not grow sufficiently to consistently outpace inflation, particularly after tax. If you have funds you won’t need for at least five years, investing could be a more prudent choice for beating inflation and growing your wealth in the long term.
Investing doesn’t have to be daunting, even for beginners. Simple solutions such as multi-asset funds can assist you in achieving your goals with varying levels of risk. When investing, if suitable, consider using a Stocks and Shares ISA to protect your returns from tax and maximise growth potential. Shares and other asset-based investments are considerably more effective than cash savings at building wealth over time, provided you are willing to endure short-term fluctuations.
THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.
THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, AND YOU MAY GET BACK LESS THAN YOU INVESTED.
THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE.
