Why a rainy day fund matters

A rainy day fund is the money you set aside for life's unexpected moments: a boiler that gives up in January, a car repair, a vet bill, or a sudden gap in income. It is not the same as saving for a holiday or a new kitchen. Its job is to keep you out of debt when something goes wrong. Most advisers suggest aiming for three to six months' worth of essential outgoings, though starting with a single month's expenses is a perfectly good first target. The key is to keep this money somewhere safe, separate from your current account, and easy to reach when you need it.

Easy-access accounts: the first port of call

For most people, the core of a rainy day fund belongs in an easy-access savings account. These let you withdraw money without penalty, usually within a day or two, and often instantly. The trade-off is that interest rates tend to be lower than fixed-term deals. Even so, a competitive easy-access account can pay around 4% to 5% AER, which is far better than leaving cash in a current account earning nothing.

When comparing easy-access accounts, look beyond the headline rate:

• Withdrawal limits. Some accounts allow unlimited withdrawals, while others restrict you to a certain number per year or charge a fee after a set number.
• Bonus rates. Many accounts pay a higher rate for 12 months, then drop to a much lower rate. Diarise the end date and switch if needed.
• Minimum deposit. A few accounts require a minimum opening balance, so check before you apply.
• FSCS protection. Make sure your money is protected up to £85,000 per person, per bank or building society. If you have more than that, spread it across different providers.

Regular savers: higher rates for monthly discipline

If you can commit to putting away a fixed amount each month, a regular saver account often pays a noticeably better rate than an easy-access account. Rates of 6% or 7% are not uncommon, but there are strings attached. You usually have to pay in between £25 and £500 a month, and the account runs for a fixed term, typically 12 months. Miss a payment or try to withdraw early, and you may lose the interest or face a penalty.

Regular savers work well for building up a specific pot, such as a Christmas fund or a car maintenance fund. They are less suitable for your main emergency fund because your access is limited. A good approach is to keep your core emergency cash in an easy-access account and use a regular saver for a secondary goal. Just remember that the advertised rate applies only to the money you gradually pay in, so the actual interest earned over the year is roughly half the headline rate.

Notice accounts and cash ISAs: middle ground

Between easy-access and fixed-term accounts sit notice accounts and cash ISAs. A notice account requires you to give notice — often 30, 60 or 90 days — before withdrawing. In return, you get a higher rate than most easy-access deals. This can suit money you are unlikely to touch immediately, such as a larger emergency buffer.

Cash ISAs are another option, especially if you have used up your personal savings allowance. For basic-rate taxpayers, the first £1,000 of savings interest is tax-free each year; for higher-rate taxpayers it is £500, and additional-rate taxpayers get nothing. If you are earning more than that in interest, a cash ISA lets you shelter up to £20,000 per tax year from tax. Easy-access cash ISAs are flexible, while fixed-rate cash ISAs lock your money away for a set period. Compare the rates carefully, as ISA rates are not always better than non-ISA accounts.

Practical tips to make your savings work harder

• Automate your saving. Set up a standing order from your current account to your savings account on payday. You cannot spend what you do not see.
• Keep it separate. Use a different bank or building society for your rainy day fund so you are not tempted to dip into it.
• Review rates regularly. Loyalty rarely pays. Check your rate every few months and switch if a better deal is available.
• Build a ladder. Keep one month's expenses in instant access, another two months in a notice account, and the rest in a regular saver or short fixed-term bond.
• Don't over-lock. Your emergency fund should be reachable within a few days. If you lock it away for years, it is not really an emergency fund.