Melanie Aspden from Hinckley & Rugby Building Society helps savers weigh flexibility against returns when choosing the right home for their emergency fund.
With so many different types of savings account available, it can be hard to figure out which one is right for you when putting money aside for a rainy day. For most people, though, there are normally two key considerations: the interest rate and how accessible the money is.
An easy-access account is a straightforward way of building a savings pot. It’s nice and simple, which is why many people find this account appealing: you put money in whenever you want, and take some out whenever you want.
The downside is that this type of account doesn’t tend to earn much interest.
A notice account, as the name suggests, requires you to provide notice of your intention to withdraw money. Depending on the account, this could be as little as 30 days or as many as 180 days, for example.
The upside is that this type of account normally earns a higher rate of interest in return for your commitment. The interest you earn depends on how long you want your notice period to be: the longer the commitment, the higher the interest.
It’s much the same with a regular-saver account, which rewards you with an attractive interest rate in return for regularly adding money to your account. Interestingly, though, not all providers require you to add money every month – as with our own, it can be optional.
Perhaps the most important thing to bear in mind when choosing a savings account is your purpose.
If your purpose is to create an emergency fund, an easy-access account may be an obvious choice. Being able to withdraw money instantly lets you react to an emergency situation. However, it’s all too easy to leave money in a low-interest, easy-access account for years, seldom actually experiencing an ‘emergency’ that you couldn’t handle within your normal budget or by other means.
On the other hand, if your purpose is to save for a specific goal or future event, you could be losing out on valuable interest by settling for an easy-access account. When you have a savings goal, you know when you’ll need that money, so a reasonable notice period is probably easy to manage.
A reasonable notice period can also be a positive thing. We’re all swayed from time to time by glossy adverts that encourage us to part with our hard-earned money, and it’s easy to be persuaded – only to regret it later. A reasonable notice period discourages withdrawals for impulse purchases, helping you to stick to your savings plan and achieve your goals.
It’s worth considering, then, what an ‘emergency’ actually means to you. Is a likely emergency something you need instant-access savings for? Or could you manage through other means? If you do need some savings to cope with the unexpected, how much should you set aside?
Deciding how exactly you benefit from having instant access to savings, as opposed to the benefit of earning extra interest, will help you decide what’s best for you.
You might decide that the ideal situation, if you are able to, is to have both: savings that you build up over time to achieve a long-term goal, and a separate pot of money that’s instantly available for a genuine emergency.
