Money, emergencies and rainy days

Most of us like the idea of having money set aside for a rainy day and generally speaking, financial advisers will tell us to keep at least 3 to 6 months’ of expenditure aside for emergencies. I agree, but what’s difference between a ‘rainy day’ and an ‘emergency’?

According to a report by comparison website, a third of the UK population has less than £600 in savings. 1 in 10 have no savings at all. Over 40% of us don’t have enough saved to live for a month if our income stopped.

But why does that matter?

A key principle of financial wellbeing is to have the ability to cope with financial shocks. These could include:

  • Redundancy
  • Illness and death
  • Divorce and separation
  • Unexpected events, like Covid-19
  • Boiler breakdowns and car repairs
  • Stock market crashes

But it’s more than just the practical convenience of having money set aside to cover these negative events.

There can be huge emotional advantages in being prepared for the unexpected. Studies have shown that a higher sense of wellbeing can be achieved by having money set aside than can be gained from receiving a pay rise.

So if you don’t yet have 3 to 6 months’ worth of spending set aside in a savings account, what could you do?

Set a target

First of all, work out something to aim for. Look back at your bank transactions for the last 2 or 3 months and find out how much you regularly spend on essentials.

Add up the monthly bills, food, rent or mortgage payments, standing orders and direct debits. This should confirm how much you would need to survive for a month, without incurring debt. You don’t need to include luxuries, such as holidays and eating out, but there’s no harm in over-estimating.

Once you know how much you need to survive for a month, multiply that number by 3. If you already have that amount saved – great. Why not double it and see if you can get to 6 months?

If the amounts you calculate feel too high and scary, begin with something smaller. Set a target to save your first £1,000 or your first £500 – anything that motivates you!

Imagine how it will feel to have that amount of money saved in, say, 6 months’ time.

Pay Yourself First

As soon as you receive your monthly income, a wage or salary for most of us, put some of it into savings. Do it automatically. That means set up a standing order so the money comes straight off your income before you get the chance to change your mind.

Don’t start the month with the idea that you’ll try and be careful, then save whatever is left over. That just doesn’t work for the vast majority of people. Something always comes up, or the psychological draw of having cash in the bank tempts us away from good intentions.

A good rule of thumb is to save 10% of your income, but if you can’t manage that, save something – anything. Just get into the automatic savings habit and it will soon become the norm.

Find a home for your savings

Interest rates are at an all-time low, so don’t expect to be making any meaningful return. That’s not the purpose of this money.

Just make sure you have a separate bank account to receive your automatic savings. Use something that’s not so easy to access, so no bank cards where you can withdraw or spend money easily.

You could also consider Premium Bonds with the government’s National Savings & Investments service.

Unlike bank accounts, Premium Bonds do not pay interest, but you can win prizes each month, ranging from £25 to £1,000,000. The odds are quite low, so don’t get excited. The chances of winning a prize are currently 24,500 to 1 for each £1 bond, but it’s a lot better odds than winning the National Lottery and crucially, you don’t lose your stake!

Then What?

Once you have set up an automated savings habit, it won’t be long before you don’t even notice the money leaving your account. It just become another bill – but you pay yourself first, before paying money out to other companies.

Then it’s just a matter of time before you reach your target.

Once there, reflect on how it feels to have that cash buffer and then set yourself a new target. You will have developed a new mindset and habit, so use it to continue building your financial wellbeing.

One Last Thing…

Don’t call this “rainy day money”. It rains far too often in the UK for it to be classed as an emergency!

This money is to help you maintain financial peace of mind and to be prepared for unexpected financial shocks. Keep it tucked away for proper emergencies and build up a separate fund for those rainy days.

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