How much should I save?

We all know that saving is important, but how much is “enough” to have in cash savings, and how much do you need to save in order to get there?

To answer this question, we’ve broken this down into two common reasons for saving:

  1. Building up an emergency fund in case things go wrong,
  2. Saving towards your life goals

Emergency savings (also known as “rainy day funds”)

Setting some money aside in an instant access savings account can give you a fund to fall back on in case of emergency.

There are different kinds of instant access savings. The best-known are the savings accounts offered by banks. However you might find you can save into, for example, an offset mortgage and benefit from a higher effective return while still being able to withdraw your savings quickly if you need to.

How much will I need in my emergency fund?

As a generally accepted rule of thumb, aim to build up your rainy day savings to the equivalent of one of the following:

  • 3 months’ income, or
  • 3 to 6 months’ household expenses

The exact amount you need depends on what your needs and financial responsibilities are. Here’s a list of questions to help you work out how much you should set aside:

  • What are the basics that you and your family can't go without each month, and how much do they cost?
  • If your boiler broke down in winter, how much would it cost to fix it?
  • If you lost your job, how long would you be able to get by without an income, or with just your partner's salary?
  • Do you have other protection in place – e.g. income protection insurance, critical illness cover – and if so, when will it pay out?

If your family depend on you and your income, you may want to consider protecting them in other ways – read our guide to protection insurance.

How can I build up my emergency fund?

Once you've worked out how much you need in your rainy day fund, you can make a plan to achieve it:

  • Find an instant access savings account with a competitive interest rate and terms that suit you
  • Use our savings calculator to work out how long it will take you to build up your savings pot, taking interest into account
  • Alternatively, set up your emergency fund as a savings goal in Moneyhub, and the tool will tell you how much you need to save each month to meet your goal by your desired date.
  • Consider setting up a direct debit into your savings account each month, to take the hassle out of saving.

Saving towards a goal

Once you've got an emergency fund, it's time to think about your goals. Savings goals could be short term like saving for a holiday or wedding, or longer term like raising a deposit for your first home.

How much should I set aside each month?

The answer depends on the type of goal you're saving for and when you need the money by, so try the following steps:

  • See what you've got. Work out your total monthly income, including any benefits, investment income or other income.
  • Take out what you need. How much do you spend each month on essentials such as food, bills, clothes?
  • Use up the leftovers. Subtract your essential outgoings from your income and you're left with your disposable income, which can be put towards your emergency fund and other savings goals.
  • Make changes. If you follow these steps and find that you don't have any disposable income, you may want to make a budget.

If your goal is short term, you may be able to make a few sacrifices in order to meet it. If your goal is longer term, you should think about whether you need to make any significant changes to your lifestyle in order to meet it.

Make savings work for you

You work hard for your money, so make sure it's growing as well as it can:

  • Use your ISA allowance: saving into an ISA will protect the interest you earn from Income Tax, up to an annual limit.
  • Choose the right type of savings account: although your emergency fund should be in an instant access account, giving up access to the rest of your savings could earn you a higher interest rate.
  • Make the most of compound interest: regular contributions over a long period of time can earn more interest than larger deposits with less time to grow.
  • Compare accounts: interest rates can vary widely between providers, so compare accounts to get the best deal. You should also regularly check that your rate is competitive, and switch if necessary.
  • Make it easy: if you want to make regular savings contributions, consider setting up a direct debit into your savings account each month. Setting it up so that the money comes out straight after pay day can help to make sure you always have enough in your account to cover the transfer.

Last updated: 10 June 2015