Ask the Expert: Money is tight and we’re building an emergency fund – where should we invest it?

Carl Lamb, managing director of Almary Green

Carl Lamb, managing director of Almary Green - Credit: Archant

Where should you invest your emergency fund to get the maximum return within easy reach? Carl Lamb from Almary Green explains.

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Byline: Sonya Duncan
Copyright: Archant 2016

£20 note £10 note Piggy bank Saving money Savings Byline: Sonya Duncan Copyright: Archant 2016 - Credit: Sonya Duncan

We are a working couple in our 40s with a big mortgage. We're building up pensions but haven't really had much of a chance to save for about 10 years – basically since the children were born.

We're finding money a bit tight this Christmas and have been worried that we might not be able to pay the mortgage but I think we should be OK.

We've decided to put aside an emergency fund next year before we spend money on holidays etc. How much would you recommend we put into this fund and where do you think we should invest it?

Response from Carl Lamb of Almary Green

It is a good idea to build up an emergency fund so that if you do have a sudden need for extra cash, you can call upon it. It's certainly better than taking out short term loans when things get tight!

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We have this conversation with clients on a regular basis and usually suggest that you put aside an amount that is equivalent to at least three months' expenditure. If you can manage to achieve six months' expenditure, that's even better, but this might be a struggle if you're starting from zero: something to work on over the next couple of years, perhaps.

The nature of an emergency fund is that you might need it quite quickly, so cash investments – bank deposit accounts, NS&I, etc – are often the best option. Equity investments do have the potential for higher returns but you could find yourself needing the money at a time when values are low. However, it's worth remembering that failing to keep pace with inflation is the one big risk of investing in cash, particularly over long periods of time.

If you invest in a cash ISA, the interest on your savings will always be tax-free while they are in the ISA, although if you have no other savings you could also take advantage of your Personal Savings Allowance which gives you each (if you are basic rate taxpayers) up to £1,000 of savings interest free of tax per year. This allowance is £500 for higher rate taxpayers. Do shop around for the best rates as they do vary – but bear in mind that the better rates are often on offer for accounts where you lock your money away for a fixed term, so may not be suitable for your emergency fund.