Help deciding how much i need in Emergency fund

Flossymuldoo

Alexland said:

Cash savings rates are currently attractive so there's no longer an opportunity cost to having a bigger emergency fund if it helps you sleep better at night provided you are not paying higher rate tax or missing employer pension matching to built it up in which case you might want to pace it a bit.

I am paying higher rate tax so it probably makes sense paying some more into my pension now.  No additional pension matching though.   

 Once I hit 20k I will have maxed my ISA out for this year, although April isn’t far away I guess. Anything save over that before April I will be getting less interest than paying it off my mortgage.  mortgage is 3.99, instant access savings account is 3.54

Flossymuldoo

Emmia said:

I'd work on the emergency fund over mortgage overpayments and additional pension - the mortgage and pension ties money up which if you were made redundant you'd want to be able to access.

But once you've hit the £20k (or whatever) goal I'd go back to pensions / mortgage over payments 

Instead of tying it up with mortgage/pension I'd put some of the money into a high interest savings account/ISA with a notice period - keeping enough money as free cash /instant access (probably at a lower rate)to get you through a couple of months.

Thank for this.  I didn’t think of locking the amount away for a higher interest rate, but leaving some at easy access 

Yorkie1

If you are a higher rate taxpayer, keeping your money sheltered from tax is a good idea; but bear in mind that unless it's a flexible ISA, you won't be able to replace money you withdraw within the same tax year. So do think about whether you want to park the ISA funds and leave them alone, and look at first-claim emergency funds elsewhere.

Also, don't forget about inflation. £20K in 5 years' time will be worth less, so you would need to revisit the ideal amount from time to time.

Eyeful

Three times I lost my job and each time I was glad I had what others would call a large emergency fund,
I always found, its better to have & not need it, than to need it & not have it.

Flossymuldoo

Eyeful said:

Three times I lost my job and each time I was glad I had what others would call a large emergency fund,
I always found, it’s better to have & not need it, than to need it & not have it.

The last time was the 3rd time husband has been made redundant. The first time I was on maternity leave and was the height of the banking crisis. It took us a while to recover from that!

The 2nd time we were in a better financial state but we were still at the point that we were running short of money when he found a job. In fact, that’s when I finally got my lightbulb moment so started working towards getting rid of all debt. 

The 3rd time gave me a massive push to become totally debt free and vow to never borrow again.   If it happens again will be well prepared!

Flossymuldoo

Yorkie1 said:

If you are a higher rate taxpayer, keeping your money sheltered from tax is a good idea; but bear in mind that unless it's a flexible ISA, you won't be able to replace money you withdraw within the same tax year. So do think about whether you want to park the ISA funds and leave them alone, and look at first-claim emergency funds elsewhere.

Also, don't forget about inflation. £20K in 5 years' time will be worth less, so you would need to revisit the ideal amount from time to time.

It’s a flexible ISA thankfully.

Great point re:inflation.  It’s probably a good idea when I set my spreadsheet up for each coming year that I do a check of outgoings and adjust my emergency fund accordingly!

Flossymuldoo

Thanks everyone for your input!   I have pondered and have a tentative plan and one that i feel happy with.
Both my and husband are going to pay an additional 4% into our pensions, and the remaining surplus is going to be split pretty much evenly between ISA and mortgage over payments. 

I need a new path laying and the outside of the house painting but deducting those, by the end of the year that should leave me with around £24k in my ISA and an additional 7k paid off the mortgage.   I plan on doing the same for the next 4 years until my mortgage fixed rate is finished, then anything above £25k in my ISA at the end of that will go off the mortgage - and if the wind blows in my direction it be around 35k extra.   I am aware though that husbands car is 10 years old, but he absolutely loves and wants to keep it until it dies, but obviously we don't know when it will die so at least we will have money in the pot for a car for him. 

When the extra 4% pension kicks in i will be paying 8% + a paltry 3% from my company and husband will be paying 8% + 11% from his company.   He earns the same as me so that will be 15% being paid into pensions.
We may also pay any future pay rises into our pensions depending on how this year goes.

Thanks for all your advice folks x

Alexland

Flossymuldoo said:

I am paying higher rate tax so it probably makes sense paying some more into my pension now.  No additional pension matching though.   

Yeah it's mad to be paying higher-rate tax in order to overpay a mortgage or build excessive savings unless you really think there is a risk you will not have enough cashflow from employment etc to service the debt until your pension access age. Even then it can be better to insure against the risks than pay so much excess tax.

Even without employer matching the tax savings (and NI savings if your employer operates a salary sacrifice scheme) from deferring the income until it can be drawn as a mix of tax-free and basic-rate are a killer deal not to be missed.

Flossymuldoo said:

Once I hit 20k I will have maxed my ISA out for this year, although April isn’t far away I guess. Anything save over that before April I will be getting less interest than paying it off my mortgage.  mortgage is 3.99, instant access savings account is 3.54

One thing you might want to consider is to split your emergency fund between true cash savings (for immediate and first month unemployment needs) and a S&S ISA or General Investment Account which might take a few days to withdraw. For example you could hold a money market fund that holds ultra low risk investments such as short dated Bank of England bonds and pays similar to the best rate savings accounts or go with a platform like Dodl (part of AJ Bell an established FTSE250 company) currently pays 4.85% on uninvested cash balances in their S&S accounts.

Flossymuldoo said:

When the extra 4% pension kicks in i will be paying 8% + a paltry 3% from my company and husband will be paying 8% + 11% from his company.   He earns the same as me so that will be 15% being paid into pensions.
We may also pay any future pay rises into our pensions depending on how this year goes.

I'd definitely look at increasing that further especially if you are still paying higher-rate tax but then I guess it depends on when you want to retire, what lifestyle you expect and if you want to use any tax-free lump sum to finish the mortgage.

You may also want to catchup with a higher % from the years you were paying even lower contributions. Whatever % contribution is required to keep your income out of higher-rate tax is usually a sweet spot for middle class tax efficiency.

Exodi

I usually resent when this question gets raised (as you get some total mickey moues numbers), but credit where credit is due, the responses in this thread are right on the money, 'it depends'.

In practice, almost two-thirds of the public believe they wouldn’t be able to last three months without borrowing money. As to what peoples ambitions should be, generally 3 months living expenses is suggested. You're clearly way over that.

You must also consider opportunity cost. Holding vast sums of money in easy access accounts means less money in pensions, or towards the (potentially more expensive) mortgage, or in investments.

Emmia

I think pumping money into mortgage/pensions is great - but not at the expense of having an emergency fund to get you through a redundancy (or two) and to provide a net to save you if you wobble off the tightrope of life.

I'd not hold the whole safety net in easy access, I would tie up some of it in something like a S&S ISA which might also come in handy as a drawdown option if one or both of you decided to retire a little earlier or to pay off the final bit of the mortgage.