It pays to expect the unexpected, particularly when it comes to your finances — so a rainy-day savings fund can make all the difference.

Setting aside money can be challenging, but a reserve fund offers long-term benefits in a range of circumstances, from out of the blue expenses to a drop in income due to redundancy or ill-health.

Having a back-up savings fund means retirement savings and pensions can stay invested for the longer term, maximising growth opportunities.

The link between financial well-being and mental health underlines the importance of building some kind of resilience into your planning. A financial cushion lets you manage budget shortfalls without borrowing or tapping into other investments or pension funds.

Private pensions can be accessed from age 55, but withdrawing funds early can have downsides: you might sell investments during a market downturn or incur tax charges, and future pension contributions could be restricted. Having a back-up savings fund means these retirement savings and pensions can stay invested for the longer term, maximising growth opportunities.

Easy access

Rainy-day savings for emergencies should be in an easy access account. Using a cash ISA means all interest is earned tax-free. On ordinary savings accounts basic-rate taxpayers can earn £1,000 in interest a year tax-free, with higher-rate taxpayers’ tax-free interest set at £500; beyond this interest is taxed at the saver’s marginal rate. With rising interest rates, more savers might face tax on savings interest, making cash ISAs more appealing. The annual ISA allowance is £20,000, shared across all ISA types.

As a rule of thumb you should aim to build funds through regular savings that would cover your usual expenses for three months.