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Money Matters Contingency Fund / “Rainy Day” Fund
C
ash provides a lovely comfort blanket … it sits there through wind and rain
(remember those? ... “summer” we used to call it), through each uncosted Autumn Budget, and is available as soon as it is needed. The roof blows off; we call on cash.
The car breaks down; we call on cash. Oasis tickets are released; we I call on cash. The essentials are covered. A contingency fund helps us sleep
at night and absorb life’s dramas when they surface. A must! … But how much should we save? HSBC advises customers to hold a
value of between three and six months of essential expenses – cash that would enable you to pay your rent, mortgage, utilities, and food bill, if your income ceased.
Example: - By Rob Cowsill - IFA
consequence, over half of households retain a greater value of cash savings. “The better part of valour is
discretion” (from Billy’s Henry IV, Part 1) certainly applies to financial choices and there’s an innate bias towards the lower volatility which bank accounts and cash ISAs provide. Investors feel the losses more acutely than the gains. Capital is protected, anxiety is
eased, so labelling this as “low risk” is commonplace … but this needs attention.
If your cash is receiving
a lower return than the inflation rate your spending power is reducing each day.
The compounded impact of saving
cash at the bank can be stark, and I would be hesitant to underplay the risk of holding excess cash assets. Inflation is a key variable (see the
graph below).
banks rarely mitigate this risk to long- term savings and are certainly not proactive in doing so. A mix of goods and services which costed £100 in 2010 are now c. £159.50 according to the Bank of England inflation figures; that’s a 37% fall in purchase-power over the period. Stocks and shares within the
FTSE-100 expose clients to higher risk, to greater volatility, and to reduced accessibility, but achieved an annualised total return of c. 7% (IG. com). That equates to a return of 98% as at the end of trading 13 September 2026. Despite wars, a lack of economic growth domestically, and polarised politics, the markets still provide positive returns in five of every six years, on average (
vanguard.com). In the last twelve-months investors have benefitted from a 41% climb in the Japanese markets, a 15% rise in FTSE- 100 and a 19% increase in the NASDAQ. Cash returns have seen a fraction of this.
So, there’s a clear
opportunity cost of holding cash and a dent in the established “low risk” classification; remember risk is relative. There are also
alternative assets classes to consider – property, bonds,
If your cash is receiving a lower The median UK household retains
c. £12,000 in savings, which in the example above equates to HSBC’s ideal of six-months of ‘rainy day’ savings. However, a median is simply the middle number in a set of data - in this scenario the UK population - and by
return than the inflation rate (CPI in the schedule above) your spending power is reducing each day. Take a moment to absorb the frequency of inflation shocks across a lifetime. There are online banks and other institutions that may be able to provide value over this rates-cycle, but this often requires several transfers - chasing the ‘best’ returns - and options may not be available to retail customers. Crucially, the high-street
infrastructure etc - which each provide a different risk and return profile and help to diversify a portfolio. Add in the availability of government tax incentives and tax-efficient wrappers and the cost of the “low risk” approach rises.
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