How massive ought to your emergency financial savings pot REALLY be?

Savers could need up to £50,000 to have a sufficient emergency savings pot depending on their age and circumstances.

The recommended amount of emergency savings varies between just under £5,000 and just over £50,000, investment platform Hargreaves Lansdown reveals.

The rule of thumb is to have enough cash to cover three to six months’ worth of essential expenses in an emergency savings fund while you’re working and one to three years’ worth in retirement, it explains. 

Households spend on average £2,058 on essentials each month. So the cost of three months’ worth of essentials for the average person is £6,174.

Those aged 60 and over have the lowest costs at £1,390 a month, while those in their 40s have the highest costs coming in at £2,349 a month.

The cost of three months’ worth of emergency spending for someone in their 20s is £4,788, while the cost of three years’ worth of essential spending for someone aged 60 and over is £50,040.

Some 65 per cent of households do have enough emergency savings to cover them. But this drops to one in three for lower income households, and also among those in their early 20s.

So how much do you really need in emergency pots?

According to financial services firm Hargreaves Lansdown, while you are working you need cash to cover three to six months’ worth of emergency spending for the household. But this rises to one to three years’ worth after stopping work.

When it comes to calculating how much you as an individual need for your emergency pot, Sarah Coles, head of personal finance at Hargreaves, said: ‘Where you fall on the spectrum of three to six months or one to three years will depend on your circumstances.

‘If, for example, there are a number of people relying on your income, and you have had health problems in the past or your income is variable, you’ll probably feel more comfortable holding more.

‘If you have a secure job, good health, wider family to call on when things get tough, and nobody else spending your income, you might be happier with less. Your considerations should also include how many earners there are in the family and the insurance cover you have in place.’

Younger people are more likely to fall short with their emergency pots – and among all those aged under 35, fewer than two thirds have enough savings. 

It hits a low between the ages of 20 and 24, when only 31 per cent hold enough cash in emergency savings, according to Hargreaves Lansdown.

Where should you be keeping your emergency savings pot?

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More than 12million Britons could improve their financial situation over the long term by shifting money in cash to investments. 

The best place for your emergency fund is an easy-access savings account or cash Isa. At the moment, you can get interest of more than 5 per cent on both into the bargain, so it’s worth checking out online banks and cash savings platforms, where you can usually find higher rates.

This is Money’s easy-access best buy tables feature accounts paying rates of 5 per cent or more

Monument Bank’s easy-access account pays 5.03 per cent. It has a high minimum deposit of £25,000. This account can be opened in Monument Bank’s app.

Oxbury Bank has an easy-access account which is offering 5.02 per cent. It has a minimum deposit of £20,000 and can be opened online. It is a limited easy-access account so could be removed from sale at any time.

Both Monument and Oxbury’s accounts are taxed and savers can keep more of their interest by getting a cash Isa instead.

With savers paying more tax due to high interest rates and a frozen Personal Savings Allowance, savers with bigger pots would be wise to consider an easy-access cash Isa to scoop some of their interest out of the taxman’s hands.

Plum’s easy-access Isa* pays 5.17 per cent making it the best overall rate for an easy-access cash Isa but this includes a bonus of 0.86 per cent for 12 months, and those who make more than three withdrawals in a year see the rate drop to 3 per cent.

The other drawback is that it is not flexible. A flexible Isa allows you to take money out and pay it back in without using up part of your annual Isa allowance. The only caveat is that you must replace the cash in the same tax year.

The best flexible easy access cash Isa comes from Chip* at 5.1 per cent, while Zopa pays 5.08 per cent – both are app-based accounts.

Paragon Bank’s Isa is also flexible and pays 4.95 per cent. It can be opened online but only allows two withdrawals per year before the rate drops to 1.50 per cent.

Yorkshire Building Society’s easy access cash Isa* pays 4.5 per cent and is flexible with no limits on withdrawals.

> Five of the best cash Isas: This is Money’s pick of the top deals

If you find your savings accumulating beyond what you genuinely need, you might want to consider investing.

Coles said: ‘Building an emergency savings net is vital, but not at the expense of other aspects of your finances. It often makes sense to build up savings and pensions at the same time.

‘If you have regular surplus income to put away, you could direct part to cash and part into a pension until you have enough set aside as an emergency fund and then start fully investing your money. 

‘Equally, an emergency fund, by its very nature, will wax and wane as it is called upon so replenishing this while continuing to invest for the longer term is completely sensible.’