Cash Savings

When we talk about savings we are primarily talking about cash, and usually about shorter term goals. The main reason cash is suitable for the short term is primarily to do with its flexibility, it can usually be drawn in an emergency to respond to something unexpected. This brings us to possibly the most important form of cash savings – an emergency fund. An emergency fund should be set up in an instant access cash savings account and should be around the size of 3-6 months’ worth of expenses.

The idea of an emergency fund is to protect you from the unexpected, be it the car breaking down, the boiler going out or potentially even to cover you for a short stint of unemployment. However, cash savings do have some drawbacks which are important to consider. The interest your savings grow by is unlikely to outpace inflation so the overall spending power of your money is likely to go down over time and if you do have a significant amount of cash savings you could be liable to pay tax on the growth of your cash. This is because of the personal savings allowance (PSA) which is an amount you can make in savings interest before you have to pay on it, for basic rate taxpayers this is £1,000, for higher rate it is £500 and additional rate taxpayers have to pay tax on all interest from cash savings.