How Big Should Your Emergency Savings Fund REALLY Be?

Savers may need up to £50,000 to have a sufficient emergency savings fund depending on their age and circumstances.

The recommended amount of emergency savings ranges from just under £5,000 to just over £50,000, investment platform Hargreaves Lansdown reveals.

The general rule of thumb is to have enough cash to cover three to six months of essential expenses in an emergency savings fund while you’re working and one to three years during retirement, he explains.

Households spend an average of £2,058 on basic items each month, so the average cost of three months of basic items for one person is £6,174.

People aged 60 and over have the lowest costs, at £1,390 a month, while people aged 40 and over have the highest costs, at £2,349 a month.

The cost of three months of emergency expenses for someone aged between 20 and 30 is £4,788, while the cost of three years of essential expenses for someone aged 60 or over is £50,040.

Around 65 per cent of households have enough emergency savings to cover them, but this figure drops to one in three for lower-income households and also among those in their early 20s.

So how much do you really need in emergency reserves?

According to financial services firm Hargreaves Lansdown, while working you need cash to cover three to six months of emergency household expenses, but this amount increases to one to three years after you stop working.

When it comes to working out how much you as an individual need for your emergency fund, Sarah Coles, head of personal finance at Hargreaves, said: ‘Where you fall on the three to six months or one to three years spectrum will depend on your circumstances.

‘If, for example, there are several people who depend on your income and you have had health problems in the past or your income is variable, you will probably feel more comfortable keeping more.

“If you have a stable job, good health, a larger family to fall back on when things get tough, and no one else spending your income, you may be happier with less. Your considerations should also include how many wage earners there are in the family and how much insurance coverage you have.”

Younger people are more likely to run out of emergency funds, and among all those under 35, less than two-thirds have sufficient savings.

According to Hargreaves Lansdown, the lowest level is reached between the ages of 20 and 24, when only 31 percent have enough cash in emergency savings.

Where should you keep your emergency savings fund?

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More than 12 million Britons could improve their long-term financial situation by shifting cash into investments.

The best place for your emergency fund is an easily accessible savings account or a cash savings account. Right now, you can earn interest of over 5 percent on both options, so it’s worth checking out online banks and cash savings platforms, where you can usually find higher rates.

This is Money’s easy-to-access best buy charts include accounts that pay rates of 5 percent or more.

Monument Bank Easy Access Account It pays 5.03 per cent. It has a high minimum deposit of £25,000. This account can be opened on the Monument Bank app.

Oxbury Bank It has an easy access account that offers 5.02 per cent. It has a minimum deposit of £20,000 and can be opened online. It is a limited easy access account, so you could withdraw from the sale at any time.

Both Monument and Oxbury accounts are taxable and savers can keep more of their interest by taking out a cash ISA instead.

With savers paying more tax due to high interest rates and a frozen personal savings allowance, savers with larger funds would do well to consider an easy-access cash ISA to take some of their interest out of the hands of the taxman.

Plum Easy Access Isa* It pays 5.17 per cent, making it the best overall rate for an easy-access cash ISA, but this includes a 0.86 per cent bonus for 12 months, and those who make more than three withdrawals in a year see the rate drop to 3 per cent.

The other drawback is that it isn’t flexible. A flexible ISA allows you to take money out and put it back in without using any of your annual ISA allowance. The only caveat is that you must replenish the cash in the same tax year.

The best easy-access flexible cash ISA comes from Chip* by 5.1 percent, while Zopa pays 5.08 percent – ​​both are app-based accounts.

Paragon Bank ISA It is also flexible and pays 4.95 percent. It can be opened online, but only allows two withdrawals per year before the rate drops to 1.50 percent.

Yorkshire Building Society Easy Access Cash ISA* It pays 4.5 percent and is flexible, with no limits on withdrawals.

> Five of the best cash ISAs: Here’s Money’s pick of the best deals

If you find that your savings are accumulating beyond what you really need, you may want to consider investing them.

Coles said: “Building up an emergency savings network is vital, but not at the expense of other aspects of your finances. It often makes sense to build up savings and pensions at the same time.

‘If you have regular surplus income to save, you could put part of it into cash and the rest into a pension fund until you have enough money set aside as an emergency fund and then start fully investing your money.

‘Similarly, an emergency fund, by its very nature, will grow and shrink as needed, so replenishing it while continuing to invest for the long term makes perfect sense.’