Life isn’t always predictable, and sometimes things can go wrong.

Whether it’s a larger-than-expected bill, a broken boiler, or an unforeseen redundancy, there are plenty of ways that unexpected financial stress can impact your life.

One way to minimise the impact of unexpected financial strain is by putting money aside into a rainy day fund. Throughout this article, we will be explaining the basic details around a rainy day fund, including:

• What is a rainy day fund?

• How long should a rainy day fund last?

• How can I build a rainy day fund?

• How much should I save?

• Should I try to save extra?

Getting Started With Your Rainy Day Fund

What Is A Rainy Day Fund?

A rainy day fund, also known as an emergency fund or safety net, is a separate pot of money, distinct from your current account and investments, designed to help you during difficult financial periods.

There are a few features that a good rainy day fund should include. To establish a useful rainy day fund, it should:

• Be immediately accessible: You should be able to access your rainy day fund immediately, which means it should not be invested in a place where you cannot disinvest quickly or saved in an account that would incur penalties for withdrawing the money.
  
  

• Be used only in emergencies: For example, if you want to pay for a holiday, it would be better to save for it separately rather than drawing down your emergency fund and repaying it later.
  
  

• Be a reasonable size: If you have a comfortable amount saved in your rainy day fund, then it's time to start adding that money to other investments or start saving separately for something you really want.

How Long Should A Rainy Day Fund Last?

Although opinions can be divided on exactly how long your rainy day fund should last, a good rule of thumb is that you should ideally be able to access 3-12 months’ worth of critical expenses. This way, the fund can cover your bills while you are looking for work or overcoming a difficult situation.

However, many people are not in a position to have 12 months’ worth of living expenses sitting in a savings account.

The important thing to remember is to save for emergencies, whether it’s one month’s worth of bills or twelve.

Start by calculating the cost of non-negotiable bills and expenses for one month and aim to save that amount. After that, try to save for an additional two months’ expenses before reassessing your goals.

How Can I Build A Rainy Day Fund?

Multiple strategies can help build a rainy day fund.

If you are in a position to save a substantial amount of your income every month, then creating a rainy day fund should be your top priority. Putting aside all your expendable income for two to three months will help you build a buffer if you need to take unpaid time off, or are hit with an unexpected bill.

If you don't have a lot of money left over every month, it’s a good idea to save a little bit towards your goal with every payday.

You might be tempted to wait until the end of the month to see what you have left, but it's best to avoid this if possible. Likely, there won’t be any money left at the end of the month, and you will remain unprotected.

On payday, try to set aside any amount regularly, even if it’s only £10 or £20. The key is regular saving: putting money away and not touching it allows it to grow, meaning the longer you save for, the more financially secure you become.

How Much Should I Have Saved In A Rainy Day Fund?

How much you should have saved in a rainy day fund varies quite a bit from person to person, depending on factors such as age, income, and whether you have any dependents.

Ideally, the average person should be aiming for 3-12 months’ worth of critical bills. These bills include rent or mortgage, utilities, council tax, and anything essential for you to continue working. This could also include your mobile phone, and is likely to include your internet.

For most people, £1,000 is a good initial target to aim for, as having that amount in an instant-access savings account can provide a buffer for unexpected bills. However, with work and consistent savings, a rainy day fund could contain up to £5,000 for a person without dependents.

Should I Save More In My Rainy Day Fund?

Opinions can be divided on how much money is too much for an emergency fund. Some people advocate for keeping a large amount of money in an instant-access savings account, up to around £20,000.

However, for most people, this amount may be more than is needed to survive for 3 to 12 months. Instead, once you have established a rainy day fund that makes you feel secure, it could then be a better idea to start putting the money that was being added to your emergency fund into an investment strategy, whether that is an ISA, a Tax Exempt Savings Plan or some other form of saving or investment where it can earn interest, dividends or bonuses.

Start Planning Your Financial Future With Sheffield Mutual

Although Sheffield Mutual doesn’t offer any instant-access savings accounts, there are still plenty of ways to save your money. 

Once you have established your rainy day fund, consider continuing to save in one of our ISAs, like our Regular Premium Investment ISA or our Regular Premium Sustainable ISA, both of which are great options to help you make the most of your ISA allowance and continue on your savings journey.

Please Note: Capital at risk. Please consider all investments carefully when deciding upon an investment strategy. 

If you have questions about any of Sheffield Mutual’s products, or you are considering becoming a member of Sheffield Mutual, feel free to get in touch with one of our team members by emailing enquiries@sheffieldmutual.com or calling us on 01226 741 000.

This blog provides generic information and the writer's opinions and should not be relied upon for investment decisions. Sheffield Mutual has provided no advice. If you doubt whether a savings or investment plan suits you, consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.