The best ways to set up an emergency savings account during lockdown

The coronavirus crisis has already cost millions of people their jobs and reduced household incomes. With warnings of more cuts and a possible future recession, many will be looking for ways to safeguard their finances. Should an emergency savings pot be part of your plan?

An emergency savings pot seems a basic thing to have, but it's often overlooked - something everyone intends to sort out later, but never quite gets around to.

Indeed, before the UK lockdown came into force at the end of March, one in five workers had no cash set aside for emergencies, according to a survey by investment platform AJ Bell.

But the ongoing lockdown could be an opportunity to grow your savings. Finder.com, a comparison site, found that the average British person who is working from home is saving £44.78 every week, by not going out, not commuting and not buying lunch out.

Here, Which? explains who should consider an emergency savings pot and how to go about building one.

• Read the latest coronavirus news and advice from Which?

Who needs an emergency savings pot?

It's worth pointing out that an emergency savings fund is not a good idea for everyone.

If, like many people, the coronavirus crisis has pushed your finances to breaking point, just focus on getting by for now until your situation improves.

Similarly, if you're in a position where you're accruing debt you're struggling to pay off, focus on doing that before thinking about savings.

Emergency savings might not be necessary if you have insurance policies that will cover you for unexpected situations many people save for. Income protection insurance, for instance, could provide cover if you lose your job.

If your debt is under control and you think you're in a good position to start saving, follow our tips below.

• Find out more:50 ways to save money

1. Pay off certain debts first

While you don't need to worry about paying off your mortgage or student debt before you start saving, those with payday loans or expensive credit cards and personal loans should look to clear them - or at least consolidate and reduce what's owed - before looking at savings.

That's because the amount you'll be charged in interest is likely to far outweigh the benefits of having savings.

For example, if you have expensive credit card debts you could transfer your balances onto a 0% balance transfer credit card, which will allow you to pay them off without accruing interest (for a limited time).

If that's not possible, just focus on trying to get the lowest interest rates wherever you can, and try to pay off whichever debt has the highest interest first.

• Find out more:44 tips for paying off your debt

2. Calculate a savings target

The general rule of thumb is to go for at least three months' essential outgoings. This would include things such as rent or mortgage payments, bills and basic expenses.

That way, if you were to lose your job, you'd have enough of a buffer to keep you going until you found employment elsewhere.

So, if you typically spend £1,500 a month on rent, bills and groceries, an emergency savings pot of £4,500 would be a good target to start with.

You might also want to factor in some common unexpected expenses. According to the Money Advice Service, these commonly include car repairs or replacement, opticians and glasses costs, technology breakdown and vet's bills.

3. Work out how much you can save

This will vary from person to person depending on your monthly outgoings and your ultimate emergency savings goal.

It's worth getting hold of a few months' worth of bank statements to have a look at your outgoings, and what you could feasibly save each month.

While you're there, check to see if there are any recurring bills or other payments you could cut back on. Everything from switching energy providers to cancelling unused gym memberships and cutting back on luxuries can all make a big difference if you channel the money you're saving straight into a savings pot.

If you can't commit to that right now, there are still options. Several banks now have 'round-up' features, where your digital spare change is put into a savings pot. For instance, if you spend £12.50 on groceries, the total taken from your current account will be rounded up to £13, and the extra 50p will be transferred to a separate savings account.

Or, you could just try saving just £1 a day, to end up with £365 after a year (technically, £366 this year). It all adds up.

• Find out more: how to cut your bills during coronavirus lockdown

4. Find an account for your emergency savings

To make sure you don't accidentally end up spending your savings - and prevent you from being tempted to - it's best to keep your emergency pot separate from your current account.

Before making a decision, you'll need to consider:

• does the account allow regular deposits, and do they have to be of a certain amount?
• does the account allow unlimited withdrawals, and will you have to wait to get the money?
• if the account pays interest, is there an underlying bonus rate that will be cut after a certain amount of time?
• can you open and manage the account in the way you'd like?

Instant-access accounts, notice accounts and regular savings accounts are best suited, as long as you're clear on the terms of the account.

• Instant-access accounts are usually the most flexible but tend to also offer the lowest interest rates. Some come with terms that offer a limited number of withdrawals per year.
• Notice accounts offer a similar amount of flexibility; the only catch is you'll have to give notice before you can get your cash. The most common notice periods are 30, 60 and 90 days; so you'll need to plan ahead.
• Regular savings accounts tend to restrict the amount of money you're allowed to deposit each month - and many also have terms that say you must make a deposit every month to keep the rate.

These kinds of accounts tend to have a variable rate, meaning it could change at any time. As savings rates are generally on the decline right now, it's best to regularly check if you're still getting a competitive rate.

• Find out more:how to find the best savings account

5. Find ways to stay motivated

The easiest way to make savings become a habit is to set up a direct debit and standing order to leave your account each month - it's best to do this just after you've been paid.

If you're finding that you regularly need to withdraw money from your savings, it may be that you're trying to save too much; reduce the amount a little and see if you can consistently leave it in there.

It's hard to stay motivated to keep saving over a period of months or years - so you could break down your overall target into smaller goals, and reward yourself when you reach them.

For instance, your main emergency savings target might be £6,000, and it's going to take you two years to get to that amount. But, instead of waiting two years to celebrate your good behaviour, perhaps you could reward yourself when you hit £1,000, then £2,000, and so on.

• Find out more:how to plan an effective budget