Saving for a rainy day is possibly the most frequently used idiom by financial advisers.
As financial advisers, advising clients on how to save their money tax efficiently and in line with their needs and objectives is our bread and butter. However, a higher priority than meeting medium- to long- term objectives is ensuring that you have enough money set aside in cash to cover unforeseen emergencies. Without this, even the best laid plans and investment strategies may not be effective.
Common unforeseen expenses might be your car or boiler breaking down, a higher than expected utility bill, or losing your job. Incomes for many people (and businesses), have taken a big hit as a result of the Covid-19 pandemic.
Whilst few would disagree with the importance of saving for a rainy day, the reality is somewhat different. A study carried out in 2017 found that 26.5 million of us do not hold adequate savings for a rainy day, while 14.4 million working age adults in Britain have no savings at all. (Source: Saving better, The Social Market Foundation (SMF), 2017).
In a previous SMF survey, where respondents were asked to self-identify as either “managing”, “struggling” or “not managing” financially, of the “not managing” group, only 12% responded to say that they have sufficient rainy day savings in place, which compares to 34% of the “struggling” group, and 64% of the “managing” group. Therefore, a significant proportion of the population would appear to not have enough set-aside for a rainy day. Of course, this was well before the Covid-19 pandemic; I wonder what those figures would be now. (Source: SMF analysis of Wealth and Assets Survey, 2010-2012).
So how to address not having sufficient rainy day savings?
Spending less money than you earn is a prerequisite. This is, of course, easier said than done. If you are spending more than you earn, you are setting yourself up for financial strife.
A very useful exercise to achieve this end is to complete a budget planner. To be fully effective, it is essential that all expenditure is included, and you are entirely honest! There are many tools online that can help you with this task such as those from the Money Advice Service, MoneySavingExpert and plenty more.
Once you’ve completed this exercise, you can start identifying where reductions in expenditure can be made. With perseverance and self-discipline, factoring savings into your budget should be achievable and you can then begin to build your rainy day fund.
How big should your rainy day fund be?
This is clearly an important question. If your rainy day fund is too small, you may not be able to ride out unforeseen financial shocks and may be forced into making bad financial decisions (for example, you may have to resort to racking up credit card debt or taking out unsecured loans). Alternatively, you might be forced to sell long term invested assets at an inopportune moment, which could have a negative impact on even the best laid financial plans.
Nevertheless, having more money in cash than you require for rainy day needs could also be costly. Interest rates are currently at historically very low levels, and in real terms the value of savings left in cash will fall over time due to the effect of inflation.
Typically, we would suggest that your rainy day fund should at least equal 3 months’ worth of expenditure. However, the right answer for you is likely to vary somewhat depending on your personal circumstances, income and expenditure.
If you would like expert advice on building a robust financial plan and making the most of your savings then please contact us and we would be happy to help.