Emergency savings help us to withstand nasty surprises - Sarah Coles

HL surveyed 10,030 UK adults with Focaldata in June, and asked them about the money they’d set aside for a rainy day: 51% didn’t have enough in emergency savings.

As a rough rule of thumb, while you’re still working you should have emergency savings of 3-6 months’ worth of essential spending in an easy access account. Once you reach retirement, this rises to 1-3 years’ worth.

The good news is that people in Yorkshire fared slightly better than average, but still 41% were able to cover less than three months’ worth of essential expenses, and one in five couldn’t cover a single month. In the region, 46% of people felt secure about the level of savings they had, but 25% felt quite insecure and another 25% didn’t feel secure at all.

But it’s not just people in financial difficulty whose emergency savings funds fall short. Even among retirees, 46% don’t have enough money to cover nasty surprises. Meanwhile, 23% of households bringing in over £100,000 a year say they couldn’t cover their essential outgoings for three months.

This may be due in part to the tendency of expenses to expand to fill the cash available, so there’s nothing left over for savings. It may also be because higher earners simply don’t see themselves as the kind of person who needs something to fall back on.

Some people will assume they don’t need emergency cash, because they can spend on credit cards if push came to shove. However, the risk of this approach is in building up debts at a time when you might be vulnerable. And as many people have discovered this year, banks reserve the right to cut your credit limit at any time.

There will also be higher earners who find the target of 3-6 months of outgoings is so high that they decide it’s a waste to keep that much in cash where it’s earning next to no interest. This may make it much more difficult or costly to get hold of that money in a crisis.

What’s even more worrying is that huge numbers of people who don’t have enough savings, aren’t worried about it at all - particularly among retirees. One in ten (11%) people don’t have enough set aside in savings, but are perfectly happy with the level of savings they have. This rises to 21% among those who have retired.

It means we all need to take stock, so we know exactly where we stand, and what we need to do about it.

How much is enough?

This starts with working out how much you need to save. Where working people sit in the range of 3-6 months’ of essential spending will depend on their circumstances. This will include things like how secure their employment is, who else depends on them, and how much flexibility they have over their outgoings.

In retirement, where they sit between 1 and 3 years’ worth of spending will include issues such as how they are taking a retirement income, and how much of it is guaranteed. They will also need to decide which of their expenses you consider essential

On average, it means having at least £3,000 in savings for the average single working person, and in retirement, this is at least £9,000.

Emergency savings is one of the key steps we all need in place to be financially resilient and withstand nasty surprises.

The pandemic helped us all realise how difficult it is to predict what life holds in store, and that we need plans in place so we can cope with the unexpected. Unfortunately, the FCA has also found that the crisis has eaten away at our financial resilience. In October last year, it calculated that 12 million UK adults have low financial resilience – and 2 million had lost resilience since the start of the crisis.

To help people build their resilience, HL has put together a set of rules called 5 to Thrive.

Control your debt – debt isn’t in itself a bad thing, but ensuring you can use it for your benefit rather being controlled by it is crucial. High cost debt can be particularly damaging for your finances.

Protect your family – no one is immune to something going wrong, and if something happens to you, it can hurt your loved ones. That’s why things like protection insurance, the death benefits on pensions and writing a will are so essential.

Save for a rainy day – it’s impossible to predict when things could go wrong, so it’s important to get ahead of the game by building a cash buffer for unexpected emergencies.

Plan for later life – we can’t just focus on what’s around the corner, so we need to think about the long-term too. Getting to grips with your pension and making sure you’re building a large enough pot for retirement will help protect you when you finish work.

Invest to make more of your money – once you have built your short term resilience and are confident in your pension savings, you can consider investing, which gives you the opportunity to make your money work harder for you.

Of course, knowing the rules is just the first step. Over the next few weeks I’ll be offering some pointers in each area so you can see whether you have any gaps you need to consider filling. That way you’ll have a plan A, B and C too, and together we can finally make being resilient as cool as it should always have been.

Inheriting a problem

Millions of people hold stocks and shares ISAs (2.7m people paid into one in 2019-20). If we hold investments and leave them to our loved ones, almost half of people wouldn’t have a clue what to do with them.

48% say that if they inherited investments, they wouldn’t be confident they’d be able to manage them properly. Around 8% of would put it in their current account, while 38% would put it in a savings account. But converting investments into cash could come at a high price, especially if you hold them for years and inflation starts to eat away at the value of their money

According to the ONS, the average inheritance is £11,000. If you received this as stocks and shares, but sold up and stuck it in the bank, you could potentially miss out on £17,686 of income and growth over 20 years (assuming savings earn 0.5% and investments 5%).

It means that anyone inheriting investments should either take the time to get to grips with their investments, or get some advice. And anyone planning to investments to their loved ones should have a serious conversation with those they intend to leave them to.

By Sarah Coles Personal Finance Analyst at Hargreaves Lansdown