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The best home for emergency savings fund

By Raymond Mulligan

Q: What would be your advice for someone who wishes to save some money on a regular basis?

A: Recent government statistics are indicating that as a nation, our spending habits are changing.

The credit crunch has brought about an increased anxiety for many individuals and this is having a dramatic effect on our consumer fuelled spending that has dominated previous years.

This ‘spend today and pay for it tomorrow’ culture is slowly reversing as confirmed by a recent survey, which showed the amount we are saving increased fourfold in the last quarter of 2008.

Much of this is driven by people concerned about job security and as a result wishing to set some money aside to cover household bills in the event of redundancy. So when it comes to saving, the first thing that everyone should consider having is an emergency fund to cover such eventualities. It is normally recommended that rather than being a set sum, this amount represents a multiple of either income or outgoings.

Again the multiple will depend on circumstances but an accepted norm is usually three to six times monthly income or expenditure.

As these monies may be required at short notice, the best place to accumulate this fund is in a cash account which can be easily accessible and accessed no matter what investment conditions are like.

The trade-off for having it in a form that can easily be got at, is that in the current climate there is unlikely to be any growth or interest added.

It is still worth shopping around however for the best possible deal as many of the banks and building societies will offer competitive rates for those who can commit to saving on a regular basis.

You should also consider accumulating the monies in the most tax efficient method possible.

So for example if you are married and one spouse has a lower tax rate than the other, then it should be placed in their name.

Having built up a sufficient emergency fund, you should then look to set some monies aside for the medium term.

Again the type of investment you should consider will be down to the timescales you are likely to require, the monies and indeed whether or not the monies will be needed all at once, or accessed over a period of time.

This is where it is important to identify your attitude to risk. If the monies are not required for say a five year period, then it should be possible to consider investing part of the money in a non cash environment in order to achieve some capital growth.

Again, tax will play an important part in the consideration of which savings vehicle to use, and more often than not it will be an Individual Savings Account (ISA) that offers the most tax efficient means of saving.

This can accommodate up to £600 per month per person, so for the majority of individuals this will be more than adequate.

Having considered the short and medium terms, then it is important to consider what you are doing to save for the longer term for issues such as retirement.

Again, in the past people have been relying on property as forming a substantial part of their retirement planning, however, with recent events this may not prove adequate and you should consider supplementing your planned retirement income by whatever means possible.

So plan your strategy carefully, ensuring that you firstly have enough in the short term whilst keeping an eye on what will arise in the longer term. And having decided upon the strategy, ensure you maximise any tax breaks open to you.

Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact or (028) 9022 1010.

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