what sum of money is a good cash buffer

What sum of money is considered to be a good cash buffer – in the case of emergency !

This all depends upon your personal circumstances, lifestyle, and what you spend your income on.

Most financial experts state that you should ideally aim for between 3 to 6 months living expenses.

However though, this amount is beyonf the reach of the vast majority of people. Who may be living pay check to pay check. 

So you should aim for a figure that is readable and obtainable to you. So you can eliminate any undue stress in the event of dealing with financial emergency or breakdown that needs to be dealt with straight away.

My own personal opinion:

I like to have around £ 1,000 sitting in an instant access account. That can be accessed in the click of a button, or obtained by visit to cash machine or ATM.

This money is ring fenced in a specific emergency fund account and it only used for such unexpected costs. 

• This could be car breakdown, MOT, road  tax and car insurance at set dates.
• It could be for repair within the home such as annual boiler service.
• Upcoming birthdays for the children.

But when funds are taken out the account, it is then topped up through monthly top-ups so that amount is always above £ 1,000

I do hold a similar amount in my wife’s name also to meet any unexpected costs.

You should aim for 3 buckets !

Your current account:

Where your income or salary is paid and you use that money to cover monthly bills and expenses such a mortgage /rent, food utilities, socialising and eating out, hobbies etc.

Emergency – rainy day fund:

An amount held in a separate  instant access bank or building society, As stated above to cover any unforeseen costs to cover essential bills such as rent, utilities, monthly subscriptions, food and transport costs.

Savings fund:

This could be to cover bigger ticket items, such as new holiday, newer car, home improvements or upgrades. 

These savings should be held in an account banking a better rate of interest, ideally a simple CASH ISA.

What about physical cash !

We now seem to live in a society which is going cashless. In that most time she purchases in shops, restaurants, bar, petrol stations, transport, car parking etc are done by tapping the app or contactless machine in a matter of seconds.

You may wish to carry physical cash around but you may limit this to say £ 50 or £ 100 to use within specific circumstances or emergency.

Your emergency fund is your priority.

The idea of borrowing from family and friends isn’t always an option, while falling into debt can mean racking up
interest charges ahead of paying it back.

There’s also the possibility of another expense coming up
before you’ve paid off the last – making problems worse.

So you should build up your emergency fund as soon as possible.

As stated above the aim is to have enough savings to cover unexpected costs, in a worse case scenario.

Without the need to borrow or put funds on overdraft with your bank. Or high interest repayments products such as short term loan or credit cards.

It may be worthwhile to calculate your living expenses !

Spend some time to review where you are spending your money say over a 3 month period. You will see patterns emerging on where you are spending your income.

Get set aside a figure you are comfortable with to cover essential expenditure:

• mortgage / rent
• utilities such as gas / elec. water / council tax / home insurance
• life insurance
• food within the home 
• car or transport costs such as petrol, tax, insurance, MOT
• healthcare etc

Then factor in the extras:

• socialising /eating out
• entertainment
• hobbies / leisure / sport
• monthly subscriptions
• holiday / travel
• mobile bill
• clothing

Do you find you are spending or wasting lots of money in certain areas. 

Can you make small changes to reduce your monthly outgoing and improve your financial situation.

Ask yourself, how would you manage or cope if you lost your job through redundancy or restructuring.

Or suffered any lost overtime or bonus in place. How would if affect your living circumstances.

Would it create a short term problem ! 

Remember: 

You living expenses will be a lot higher the you are younger as you will have mortgage costs, commuting to work. Costs associated with bringing up young children such as school activities and extra mouths to feed.

Where if you are retired, your expenses are usually lower but they will be spent more on leisure activities, social and holidays etc.

Plus, you will probably spend more money in the earlier years of retirement when you are more mobile and active, Say during the 60’s and 70’s than your 80’s or 90’s when you are less active.

During your retirement you fund are determined by you pension provision in place. 

It could be from the state pension paid by the government. For older works it could be the security of a final salary / DB pension which increase every year as per scheme rules. 

For recent retirees, it will be funded by a pot of money invested known as defined contribution (DC) which is based upon the pot value that was created.

If you do hold cash in the later years, you may wish to keep those funds invested in low risk assets. So they are considered less volatile, but that all depends upon your attitude to risk.

So where should I keep my cash !

Ideally it should be held within a bank or building society that pays you a rate of interest.

For your emergency fund, it should be held in a low interest account that can be accessed immediately.

If you are going to hold significant levels of cash it should be held within a Cash ISA. So any growth or dividends remains tax free and doesn’t have to be declared. 

Paying rate of interest that should be beating the rate of inflation. You don’t want to see your money losing value each year. As it is being eroded away by inflation.

It pays to shop around, to get the best rates of interest. 

Once you reach a certain level of cash buffer you are happy with. You should ideally be investing that money to make it work better for you. In asset classes that will provide better growth or more risk.

What about the tax implications:

The amount of tax you pay depends on your personal savings allowance.

This lets you earn a
certain amount of interest tax-free.

Your individual allowance depends on what rate of income tax you
pay.

The below figures assume a standard Personal Savings Allowance for the 2026/27 tax
year:

Non tax payer or Basic rate: £ 1,000 interest allowance

Higher rate: £ 500 interest  allowance

Additional rate: £ 0 interest allowance.

But if you put nay funds into a ISA, your allowance is currently unrestricted and doesn’t have to be declared.

So keep things simple and use the tax-free wrappers of £ 20,000 per tax year available to you.