COMMENT
How Far Would Your Savings Stretch?

By Alison Hunt (TMFAlly)
September 20, 2005

Regular readers of the Fool will know that one of the things we're constantly mentioning is the fact that everyone should have a rainy day fund.

Depending on your attitude to risk, this fund should contain between three and twelve months' income and its purpose is to act as a kind of safety net, should you lose your job or unexpected bills need to be paid. Ideally, this cash will be kept in a high interest, instant access account and will be enough to keep you going until you get back on your feet again.

Unfortunately, many people do not appear to have this essential cash cushion in place. Recent research from Sainsbury's Bank has revealed that as many as one in five do not believe they would be able to manage financially for more than a month, should they lose their job.

According to the Office of National Statistics, three month's salary would be, on average, £5,562. Unfortunately, only a fifth of us (22%) have more than £5,000 in the bank; the average amount held by workers is £3,000. However, a whopping 30% of the population have £500 or less in savings and just over one in ten (12%) have no cash savings at all!

Estimated length of time people could
survive on their savings alone

Length of Time	Number and (%) of people in work
<1month	5.78 million (20%)
2-3 months	6 million (21%)
4-5 months	1.43 million (5%)
6-7 months	3.68 million(13%)
8-11 months	303,000 (1%)
12 months	2.94 million (21%)
>12 months	5.88 million (21%)
Don't know/No savings	2.39 million (8%)

It's certainly worrying to see that over half the population has less than £1,000 in savings, should the worst happen. Unfortunately, for many people saving even three months' worth of income is difficult to imagine as practically all of their income is used up each month on bills and other vital expenses. However, it is worth trying to put away even a little each month though as it will soon add up. And most of us will admit that we could save far more than we do, it's just that spending our cash is so much more fun!

If you don't have a rainy day fund in place, you need to think about setting one up soon. First, you'll need to organise your budget and find out just how much money you do have left over at the end of the month. To maximise this, most people will find they need to cut back elsewhere. Re-mortgaging, switching energy supplier and limiting the number of nights you go out will make an enormous difference. Limiting your take-away consumption to just once each week (as opposed to twice) can easily save a family £20, or £80 per month. And if you can give up smoking you'll improve your health and save an absolute fortune, too.

Once you've whittled away your expenses you should be left with a healthy sum that can be used to start building your rainy day fund. This should ideally be set up in a high interest, instant access account such as First Direct's e-savings account, currently paying 5%AER. What's more, as this account punishes savers who withdraw their cash by not paying interest for any month a withdrawal is made, it could help to persuade you to leave your cash alone!

So aim to get your savings into good shape by creating a healthy emergency fund. Not only is it a good method of self insuring against what might happen, having a nice stash of money in the bank could help you and your family feel more secure and help you sleep more soundly, too.

You can apply for the First Direct e-savings account and many others in our Savings Centre.