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Preparing for the unexpected

Financial Wellness

Because life and plans change, often unexpectedly, it’s a good idea to have a plan to cope with any financial setbacks. Below we answer five common questions about contingency savings.  

How much cash should I save? 

If you are just starting to save, start by aiming to have contingency savings of £1,000. Though you might want to think about how long you could survive if you lost your job tomorrow. It's ideal to have at least 3 months income saved to prepare for the unexpected. 

If you're single or have support from family members, you might be comfortable with less savings. However, if you have a spouse, children to support, and a mortgage, or worry about replacing a lost job or other income quickly, you might feel better with 6 months or more of savings.  

What about borrowing? 

In some cases, you may consider borrowing if you don't have the financial reserves to cover your expenses. If you are borrowing against your home, it's extremely important to consider the potential consequences. There may be financial, legal and tax implications and if you default on the loan, you could even lose your home. 

If you've lost income, borrowing money can be risky. Debt can quickly snowball if you're not able to pay it off at the end of the month. If you need to borrow, make sure to keep interest rates as low as possible. You can get free and impartial money advice from the Government’s MoneyHelper service.

How can I save more?

There are a couple of ways to boost savings, even on a tight budget. A top tip for saving is to treat it like you are paying yourself - think of your savings fund as a monthly outgoing. Consider opening a separate savings account and set up a regular standing order to divert savings as soon as you get paid, this could be a good way to help bolster your contingency fund quickly.

Where should I keep my savings?

Consider how quickly you might need access to your money if an unexpected event comes up. Generally, keeping your contingency savings accessible is a good idea. However, avoid dipping into your contingency, it can also make sense to in a different account from your spending money and other types of savings.

What about longer-term savings?

It’s important not to lose track of your longer-term savings goals. You could also consider taking advantage of tax relief to add savings to your pension. The Government gives you tax relief on contributions you make into your pension pot. This means for every £100 you save, the cost to you is only £80 if you are a basic-rate taxpayer. For higher-rate taxpayers, the cost could be as little as £60 – or £55 if you pay additional-rate tax. Adding a small amount now can make a big difference to your long-term savings goals.

It’s important to keep in mind that there are some restrictions on the maximum amount of tax relief you can claim each year, including an annual pension allowance. Learn more about allowances and the tax benefits of pensions. Please also note that the rates of tax relief may be different for Scottish residents. Eligibility to invest in a pension and tax treatment depends on personal circumstances and all tax rules may change.

Next steps

See how just 1% more can  make a difference to your pension savings.

Important information

The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Eligibility to invest in a pension and tax treatment depends on personal circumstances and all tax rules may change. You can't normally access money in a pension until 55, which may change to 57 in 2028. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.