It is always a good idea to have an emergency fund and a recent poll has shown that an estimated 28.4 million of us do exactly that, putting by an average of £85 away each month to cover an unexpected bill or an emergency repair.
Nearly three quarters of respondents said that they had money squirreled away, but instead of keeping it in the biscuit barrel or under the mattress, it makes sense to put it into a savings account so it can accrue interest.
There’s no point having the money just lying around dormant if it can be making more money for you, no matter how small an amount you get back in interest.
However, it is important that you choose the right savings account to suit your needs, for instance, there’s no point having an emergency fund in an account that will impose a penalty fee for making withdrawals.
So here are three popular types of savings accounts that could be suitable for saving for an emergency fund…
Easy access
Arguably the most straight forward way to save, easy access savings accounts allow you withdraw your money whenever you wish without having to pay a penalty fee.
Although they do not have the tax benefits of ISAs and do not have the best interest rates around, they are probably the best sort of savings account for an emergency fund purely because you can access your money whenever you wish.
Furthermore, you can also improve the rate of interest you receive by putting your money into an account that offers a bonus period. However, you should be aware of when this period ends and then move your money to another account with a better interest rate.
Regular savings
These accounts will often pay a higher level of interest than other savings accounts but they can also come with restrictions such as being a limit on how much you can save and having to pay in a regular amount each month.
If one of these payments are missed then some accounts will impose a penalty and some accounts will also charge you for making withdrawals.
However, if you can find an account that allows penalty-free withdrawals then this could be an ideal savings account to use as an emergency fund as it has a relatively high level of interest and also encourages you to put money by each month.
ISA
ISAs are savings accounts that allow you to invest a certain amount each financial year and any return you make is tax free.
There are two types of ISA, stocks and shares ISAs and cash ISAs and there are limits on how much you can save in each. The total ISA allowance for the current financial year (which ends on 5 April, 2013) is £11,280, of which up to £5,640 can be put in a cash ISA.
This means that if you choose to put £5,640 into a stocks and shares ISA you can then invest the same amount in cash ISA savings. However, if you decide to put £8,000 into a stocks and shares ISA you will only be able to put £3,280 into a cash ISA.
If you are a saver then the tax benefits make taking out an ISA worthwhile but, because these benefits are lost on any money you withdraw within any given tax year, they may not necessarily be the best savings vehicle for an emergency fund.