Is it worth saving for a rainy day?

With Christmas looming, putting money aside for emergencies becomes even more of a challenge. Vicky Shaw looks at new research highlighting the ongoing struggles of savers. 

Is it worth saving for a rainy day?
Is it worth saving for a rainy day?

Brighter news about the economy and signs of growing consumer optimism have given Chancellor George Osborne an early Christmas present.

But, for those of us struggling to build or maintain a savings nest egg to protect against unexpected emergencies, there are few signs of the financial gloom lifting.

New research from Lloyds Bank has found that nearly nine in 10 (88%) of us believe it's important to have money put by for an unexpected event, like a surprise household repair bill or redundancy.

But, in practice, less than half (49%) of consumers actually feel they have enough set aside to cover unforeseen eventualities.

Experts generally recommend everyone should have at least three months of their salary saved in a “rainy day” fund, but with wages remaining largely stagnant, many people are struggling just to make ends meet, never mind finding spare cash to squirrel away.

Building up savings is even more difficult at this time of year, with the cost of buying Christmas presents putting greater pressure on our finances.

The string of gas and electricity bill hikes recently announced by large energy companies will make this season's challenge particularly tough.

Two-fifths (43%) of consumers who have been unable to save over the past year said they simply don't have enough cash left over at the end of the month.

Nearly 30% of these people were aged between 45 and 54, suggesting that even those well-established in their careers are often still far from financial security.

Meanwhile, separate research from the Treasury-backed savings body NS&I suggests that even those who do have a ‘rainy day’ account are being tempted to break into it just to cover everyday living costs – essential home maintenance, paying bills and becoming unemployed were the most common reasons for dipping into a fund.

Even savers who do manage to put aside some money – and leave it there – are struggling to find bank accounts which give them a real return on their hard-earned cash.

The Bank of England base rate has been held at a historic 0.5% low for more than four-and-a-half years, and there is little prospect of this being raised any time soon.

However, despite the apparent gloom, there is one glimmer of hope. The Bank has just announced that a scheme called Funding for Lending, which was launched in August 2012 to help struggling borrowers, will be re-focused away from helping the housing market and onto helping small business borrowing – a sector which remains muted.

Funding for Lending has been blamed for making savers' plight even worse as it gives banks and building societies access to cheap funding, meaning they've become less reliant on attracting savers' deposits.

Some experts now believe that this could lead to a small improvement in savings rates in the coming months, just in time for the new Isa season, when savings account providers traditionally increase competition.

Sylvia Waycot, editor at financial information website Moneyfacts.co.uk, says: “It will take a little while for better savings rates to hit the Moneyfacts best buy tables, but as Isa season is almost upon us that would be the obvious place to see the first signs of rate recovery. “2013 has been a dismal year for savers; 2014 is already sounding so much better.”

Consumer group Which? highlights how the returns on cash Isas, a tax-free way of saving your money, have become “almost unrecognisable” in recent years.

Back in 2000, the best rate on a cash Isa peaked at 7.25%, meaning that if you had invested £6,000 into this account, you would have earned £435 a year in interest, provided the rate stayed the same over that period.

Nowadays, an instant access deal offering a rate of 1.75% is among the top-paying accounts for a cash Isa.

Investing £6,000 in a cash Isa with this rate would earn you just £105 a year in interest.

Which? says that despite plummeting Isa rates though, it's always a good idea to make full use of a tax-free account before turning to one on which tax has to be paid.

You have until April 5, 2014 to use up the cash Isa limit of £5,760 for the current tax year.   

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