this type of bank account is safe and flexible
It is important to save money because you don’t know what might come your way.
This is where a rainy day fund comes into play.
While they are designed for small fiscal emergencies, it can be tempting not to bother with them and go into your main banking account when an expense arises.
But they are important because even small expenses are enough to throw your monthly budget out of sync.
In the worst-case scenario, it can result in you taking out a loan, which can lead to further financial problems.
Having a separate rainy day fund keeps you financially stable and your main account completely intact.
Also, you don’t know what may happen.
For example, you could lose your job or an expensive home repair needs doing.
Therefore, a rainy day fund will help you get through such issues.
To save money for such emergencies, here are five methods to help you out.
Easy Access Savings Accounts
Having a savings account is essential when it comes to saving money for a rainy day.
One of the best-suited ones is an easy access savings account which gives you the flexibility to withdraw your money quickly and easily.
Also known as an instant access savings account, this type of account is a simple bank account that allows you to earn interest on your balance.
At any time, you can deposit as much cash as you want and withdraw it whenever you like without having to pay any fees or charges.
The majority of these accounts also come with a bank card so you can use it to make ATM withdrawals and pay for purchases.
In most cases, an easy access savings account can be opened online in less than five minutes.
The initial amount you have to pay into the account is usually very little, as little as £1 in fact.
To save money, this type of bank account is safe and flexible, allowing account holders to build up their savings at their own pace.
Due to the fact that you can withdraw your money whenever you like without incurring any penalties, they are suitable for rainy day funds.
However, as the interest rates are low, you will not earn much interest compared to other types of savings accounts.
There is also the possibility that you have to pay tax on the interest.
Individual Savings Accounts (ISAs)
Another type of bank account in order to save money are individual savings accounts, commonly known as ISAs.
They mostly work in the same way as other savings accounts, except that any interest you earn is tax-free.
This is the biggest draw for those looking to save money for a rainy day.
Interest rates can be fixed or variable, meaning they may change over time.
ISA interest rates are usually higher than you would find on other types of savings accounts, but typically, they are not as high as the rates offered on regular saver accounts.
You can pay in your cash in regular instalments or as occasional lump sums, provided you do not exceed the maximum yearly allowance.
With most ISAs, you have to tie up your money for a fixed term. However, with an easy-access ISA, you still have instant access to your money.
By tying up your money, you cannot make withdrawals for a specified term. But this ensures that the best interest rates are available.
As a result, ISAs are a long-term savings account, suited for rainy day funds.
Download a Savings App
It is not just different types of accounts that will help with saving money, apps are also beneficial.
There is an expansive range of saving and budgeting apps that allow users to easily save money.
Many of them work by building out your budget and calculating what you have saved each month. This can take the pressure off your shoulders.
Users can set savings goals, check how money is being spent, transfer money to different accounts and monitor savings accounts.
Due to the gig economy, many people have irregular incomes.
Savings apps provide more flexibility than traditional savings account which were not designed for modern working life.
Some of the best apps available include Monzo, Moneyhub and Money Dashboard.
Joe Parkin, head of iShares and UK digital wealth at BlackRock, said:
“Savings apps have made investing convenient, available any time, engaging using gamification and seamless through round-up technology: buy a coffee for £2.40 and 60p goes into an investment account.”
Savings apps are particularly popular among millennials who are allocating money to specific life goals.
Alex Lathan, chief executive of Chip, said:
“Millennials want to see specifically what their savings are going towards rather than arbitrary savings accounts.”
To save money in the modern-day, savings apps are a helpful solution.
Avoiding Credit Card Use
Avoid using credit cards in order to save money and build up a rainy day fund.
Because credit cards allow users to buy things whenever they want, regardless of whether they have the cash to pay for them.
This results in a debt amount that will rise due to interest.
This means that you will have to pay it off, affecting your monthly budget. If you do not have the funds to pay it off, it can lead to serious financial issues.
It comes down to self-control. While avoiding spending can be difficult, it offers many rewards in the future. It also results in money being saved.
Self-control is important because credit card interest rates are high, making purchases more expensive.
For example, if you buy something worth £1,000 using a credit card with an 18% interest rate and you make the minimum monthly payment, you will end up paying £175 in interest after one year and still owe £946 on your purchase.
Avoiding credit card use is an effective way to save money for a rainy day because instead of paying off the debt, the money can be saved.
If you have a problem with credit card spending, hide them in a safe place in your home, not in your wallet.
It is okay to have one for emergencies but do not carry it around.
If there is the temptation to use it, keeping it out of sight might help.
A simple way to save money for a rainy day is to put all of your loose change into a jar at the end of the day.
When making a purchase, never give change, only accept change back.
Place this money into the jar and it will add up eventually.
Once the jar has filled up, put this money in a small flexible cash ISA and this will become a rainy day fund.
By saving your everyday change, you can quickly build up a rainy day fund to use however you please, whether it be for much-needed house renovations or for a holiday.
Putting this change into a bank account will increase the amount even further, thanks to variable interest rates.
For some people, putting in anything less than £5 is what they opt for but it is totally up to you.
Any amount of change that you put in will help you in the long run.
These ways to save money will be a massive financial benefit to you.
They also provide peace of mind. Knowing that you have a separate fund without having to worry about not having enough money.
A rainy day fund will make life easier knowing that, even if something does come up, you are fully prepared to deal with it without going into debt.