One in five UK workers had no emergency cash fund prior to the COVID-19 lockdown, new AJ Bell research reveals.
Women are more likely to have no emergency cash fund than men – 25% compared to 17%.
On average emergency cash funds were worth around 6 months’ salary. But this is significantly lower for younger people with 18 to 34-year olds having an average of 4.5 months’ salary as a cash buffer compared to 10 months for people aged 55 or over.
Coronavirus sell-off demonstrates the value to people of all ages of holding a cash safety net. On average people think it would be ideal to hold 9 months’ salary as a cash buffer now they have seen the impact of COVID-19.
Tom Selby, senior analyst at AJ Bell said, “Millions of people in the UK were living on a financial precipice prior to the COVID-19 shutdown, with a fifth of workers admitting they had no emergency cash set aside whatsoever.
“Sadly many will now be facing huge financial distress as a result of losing their job or being forced to take a pay cut.
“On-the-other-hand, some 61% of people have not seen a drop in income as a result of the current crisis, with over two-thirds saying they are also spending less money.
“For those lucky enough to still have a job at the moment who have put off saving in the past, now could be the perfect time to build a rainy day fund.
“As a general rule you should aim to have enough money in an easy access cash account to cover at least three months’ fixed expenses. This should ensure you can pay any unexpected bills, although some will prefer to hold more than this to protect against less common risks (including hits to the wider economy).”
Cash in retirement
“It isn’t just those in employment who should think carefully about the role of cash in their lives. Those taking a retirement income through drawdown might want to consider holding a cash buffer to ensure they aren’t forced to ‘sell on the dip’ in the event of a significant fall in markets.
“While there is no hard and fast rule when it comes to holding cash in retirement, having at least enough to satisfy 12 months’ income withdrawals is a sensible approach.
“However, it’s important to remember that while cash may not fall in value in nominal terms, its spending power will be eaten away by inflation if it is held for too long.”
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