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The Saving Crisis – Why So Few Have a Rainy-Day Fund

It was recently revealed by a House of Lords committee that 40% of the working-age population have less than £100 in savings, with just 41% of British households admitting that they are saving. While financial advisers recommend that savings of between two and three months are kept (on top of spending money, pensions and other investments), many are failing to listen to this advice, or lack the funds to do so.

StepChange also found in another study, that 29% of people have no leftover chase to put into an account which could be used to cover emergency bills. The debt charity found that a further 19% stated that they had £50, or less, available each month to put into savings – and that’s only when they could afford to do so.

Based on the UK’s average salary which is £27,000, savings should be in the range of £4,500 to £6,750. However, with a fifth of households saying they would be financially unstable if their income fell by a quarter, it once again highlights the need for a savings pot which so few have.

Not only does a rainy-day fund help in a time of financial worry, if earnings decrease or an unexpected bill arises, but a savings pot also acts a safeguard from falling into unwanted problem debt. For many who experience a drop in earnings or an unforeseen expense, borrowing is often the only option to get by; with the amount borrowed, plus interest then required to be paid back.

While it could be easy to lay blame at individuals who are choosing to spend their disposable income rather than save, there are a number of other contributing factors which are affecting people’s ability to save for the future.

It’s estimated that 1.7 million people in the UK currently do not have a bank account; yet, it is this financial exclusion which is said to be keeping some of the lowest earners in a state of financial uncertainty. Currently, 65% of the UK’s ‘unbanked’ population have an annual income of under £14,500, with half of the ‘unbanked’ receiving benefits for more than five years.

Often this means that individuals such as those who do not own a bank account are offered financial products at a higher payback rate, or are excluded from accessing financial services altogether – leaving them with a costly and limited option, or none at all.

However, basic bank accounts can ensure that individuals are able to access financial services no matter how poor their credit score is – allowing them to make payments in shops, online and by direct debit. Of course, this also enables individuals to ensure that they can begin saving too.

These accounts are often unadvertised as banks often lose – rather than make – money on overdraft facilities which basic bank accounts do not come with. Instead, they often lose revenue on the administration costs of setting up and running this type of account.

It is this financial exclusion, which the House of Lords Committee believes is putting many at financial risk, as the poorest are only able to access substandard products. The ‘poverty premium’ as it has been dubbed, is creating a circle of debt for many who are simply unable to access fairly priced financial services, let alone begin a savings fund.

There is also a lack of financial education among younger generations, with many recommending that the UK curriculum should incorporate better education of financial knowledge and skills. KickStart Money is one such initiative which aims to encourage positive money managing attitudes in those aged between seven and 11 years old. With research indicating that educating those of primary school age can help to develop an understanding of the importance of saving and appreciation of money, the importance is being placed on educating future generations.

It’s also said that the amount people should have in their savings is an off-putting figure, especially when they are yet to begin saving. As we mentioned earlier, even when people are able to save they can only do so to the value of £50 per month. This means it would take 11 years and three months to reach the recommended saving amount of £6,750. A length of time which would be worrying to many, not to mention unrealistic due to the unexpected expenses which could occur during that period. Yet, no contribution to a savings account is unmeaningful, as it all adds up after all. Rather than focusing on the big amount required, smaller contributions should be encouraged to begin a savings momentum.

Low-interest rates are also cited to be to blame; as interest rates were lowered in an attempt to boost consumer spending in the post-recession and now post-Brexit economy environment that the UK has found itself in. While the return on investment may not be as great as it once was, having a savings fund is about ensuring that a secure financial future awaits, rather than personal economic uncertainty.

The common denominator through this is that the financial illiteracy the UK is facing is currently leading many to be unaware of the savings they require, the ability to access fairly priced financial services or gain an understanding of how to manage their money effectively. Yet, while the Government, and banking industry, should be doing more to increase financial education, on a personal level, individuals should be empowered to take control of their finances and gain greater financial independence.

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Andrew Wayland
Andrew Wayland is a financial marketing expert and helped set up Everyday Loans back in 2006. Prior to his position as Head of Marketing for Everyday Loans he worked as the Head of Commercial Development for a tech start up and ran his own PR agency for around 5 years. LinkedIn: https://www.linkedin.com/in/andrew-wayland-9018074