The importance of a rainy-day fund

19o February 2024

Having a financial safety net in place for unexpected life events or emergencies is one of the essentials of financial planning. Whether it’s to cover the loss of a job, household repairs, or a medical emergency, having a pot of money set aside can be both an asset and a source of reassurance.

But in the wake of a cost-of-living crisis, putting money aside will have taken a back for many due to rising prices. What’s more, the staggering inflation of recent years has undermined the value of many people’s savings.

As of January 2023, over half of those surveyed in the Financial Conduct Authority’s (FCA) Financial Lives survey revealed they had stopped adding to their savings as they needed the money to meet their daily needs.

Despite these difficulties, a robust financial buffer is still a must-have for households everywhere, and any amount put aside is better than nothing. Here are some reasons why you must continue to invest in your savings for a rainy day.

Financial security and loss of income

Society is now well aware that financial anxiety can be a major factor in people’s mental health problems, especially when the wider economic outlook is so uncertain. In 2023, a study of 2,000 Britons showed that 30% had experienced worsening mental health since the beginning of the economic crisis.

Putting money into an emergency fund can be a simple way to relieve some of the stress and anxiety you may feel regarding your finances. It can also provide you with a feeling of financial security in uncertain times.

A rainy-day fund can also help if you’re ever faced with the prospect of unemployment. Losing a job or having your income reduced unexpectedly can destabilise your financial plans. Therefore, an emergency source of income can provide reassurance by acting as a financial buffer whilst you search for new employment.

Without a rainy-day fund to fall back on, many people have to turn to borrowing money or using credit options to pay for any emergency expenses that crop up. If not handled correctly, the interest rates that come with credit can lead to a further build-up of debt and cause damage to your credit score. Having an emergency fund can help you avoid debt and protect your financial health.

Think long-term and remain flexible

It’s important to try and remain focused on your long-term financial goals, whether saving for a wedding, moving house, or even retirement. Building an emergency fund can teach you about the value of building funds in the long term without the gratification of savings for short-term goals like holidays and electronics.

Staying flexible is vital to sticking to your financial plans, and having a pot of money set aside is a valuable tool. There may be a greater opportunity for you to make the most of certain opportunities that appear during periods of economic change, such as better terms on savings accounts or increased investment openings.

To take advantage of these openings, you need to be aware of the number and variety of offers available. For example, several UK banks offer cash incentives for opening new accounts with them. It can also be a good idea to layer your cash, having money in several different accounts that all provide different benefits.

It’s crucial, therefore, that you consider all your options and ensure that the money you are setting aside for those rainy-day eventualities gives you the best returns.

Future planning

With the rising cost of living and all the financial juggling we do, saving money might feel like a distant dream, but squirrelling away a little bit here and there can make a big difference. Think of it as your personal safety net, ready to catch you if the unexpected happens.

Having some cash tucked away means you won't have to rely on credit cards or loans if things get tough, and you can rest easy knowing that you’ll be able to take advantage of a great deal when it comes along.