Some of us will have been adversely affected financially following the last 12-15 months, others will have seen a sharp increase in our savings, reaping a somewhat unexpected benefit of the UK closing its doors to our normal way of life. Whilst lockdowns ensued and we were unable to spend our money commuting, socialising or enjoying our morning lattes, it’s estimated that a record £125bn, equating to an average of £5000 per household, has been accumulated during the pandemic, according to The Bank of England’s Monetary Policy Report released February 2021.
We’ve already used some of these savings to pay off £18.8bn of debt from credit cards and loans. The Government is hoping we will use up to 10% of our lockdown savings to begin spending now that the economy is starting to open up, with the Bank of England foreseeing a positive forecast of economic growth rates not seen for over 70 years. This is sorely needed after the Centre for Economics and Business Research (CEBR) stated the lockdowns have left an alarming £251 billion deficit in the UK’s economy.
Some experts are predicting UK residents are planning a bumper spending spree, with initial priorities focused on travel and accommodation for overseas or UK based holidays (in the light of recent Government updates this is looking increasingly more likely to be of the staycation variety), followed by restaurants, food and drink, clothing, footwear and electronics. Further down the list of desired expenditure saw live performances and events as well as furniture and household equipment.
Whilst this all sounds extremely positive, and indeed necessary, for us to use our savings to aid the country’s recovery, it cannot be forgotten how the pandemic has forced us to question the necessity of having an emergency savings fund. Notwithstanding saving towards retirement, house deposits, or larger financial objectives, how much money now should we aim to keep at close hand, should the need ever arise.
According to a recent survey during 2020 almost 4 in 10 people were faced with unexpected expenses, amounting to an average cost of £1420. Whilst for many, especially if spread across a year would not be particularly traumatic, not everyone has been so financially fortunate throughout the pandemic and many were forced to borrow in order to meet these extra responsibilities. As we are (hopefully) heading down the path of recovery in the UK, although the desire to unleash our spending power is understandable, it’s critical that we still retain cash that is easily attainable.
There is no “one size fits all” magic number when it comes to answering the question of how much should be in an emergency fund as it will be different for everyone, subject to their income and lifestyle. A general rule of thumb is 3-6 months of essential expenses, but if you’re retired, holding one to three years’ worth (of essential spending only) will help in any income fluctuations from drawdown. It’s also important to note these are absolute essentials only, not the smaller luxuries that if, when pushed, could be eliminated for a period of time.
Of course where you should keep this cash is also significant as most high street banks are still paying virtually no interest with 0.01% paid out on instant access accounts. Therefore it’s worth doing your research to ascertain how much money you may need instantly and how much could be saved in accounts that require 90+ days notice which allow a slightly higher interest rate starting from 0.65%.
For larger, longer term investments it is of course essential to plan these with your financial adviser.