How much do you really need for a rainy day?
Putting aside money for a rainy day certainly isn't the most fun use of your hard-earned cash, but life's unexpected events mean you should try to build up a savings pot that will cover you for at least a few months in the event of losing your job, being landed with a particularly hefty bill, or if your car suddenly breaks down. "Three to six months' salary is a reasonable target," says financial data provider Defaqto's David Black.
It goes without saying that you will need to find the best home for your cash by shopping around for the highest-paying interest rates - not an easy feat with base rate still slumped down at 0.5%.
The best-paying easy access account (which means you can get your hands on your money at any time), is currently from ING Direct, which offers a rate of 2.75% on balances from £1.
But Black also suggests using credit cards in an emergency, if you don't have sufficient funds saved. Again, in this event, you will still need to sift out the best deal.
The market-leading card is currently the NatWest Platinum card, which is offering a 16-month interest-free period on balances transferred, with a 2.9% fee, as well as 0% interest on purchases for three months from account opening.
An alternative to falling back on your credit card or using up your savings in a couple of months, however, is to take out some form of insurance cover that pays out if you're sick.
Income protection will pay up to two-thirds of your gross salary tax-free, with average premiums of around £30 a month. For those with families or a mortgage to pay, life insurance and critical illness are other forms of protection worth considering.
More on these products here.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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