The best ways to build emergency funds

Increasing costs and stagnating if not decreasing incomes continually cause concern to many households across the country. Times are difficult and when it comes to investing for the future, most individuals wish to make the most out of the little money they have available.

For many, this is a case of simply wishing to put a little capital aside to prevent serious problems if emergency situations arise. Nobody has a guarantee that their jobs are safe and there is always the chance of some major appliance or even the car breaking down and needing to be repaired or replaced.

Having some capital somewhere to act as a safety net for such situations is vital in these unstable times. The problem is to decide where to invest one's money. With so many different possibilities, it is difficult to decide where to turn. The safest way of ensuring that funds are invested wisely is to take the time and carefully compare savings accounts.

Many different factors have to be considered when doing this, starting obviously with one's own circumstances. The first thing to consider is whether or not it is advisable to lock funds away for set periods of time in any of the fixed rate savings options currently available.

While these deals, often available for periods from one year onwards, do offer the best possible rates as a whole, they also mean that money can not be withdrawn during the specified term. There are cases where it may be possible to withdraw some of the funds, but expect penalties to be applied.

If this is not an option because you need access to your funds at all times, then the best deals to opt for are ISAs. These are simply individual savings accounts, and are not as complicated as their title may suggest. The various deals offered here provide some of the best savings accounts rates on the market. Care should be taken however, because even among these choices, there are many that offer bonus rates. These rates are usually introductory and therefore intended to attract customers; it is therefore wise to be certain that they will not drop after a certain time - one year is common.

Unless you plan, or will even be allowed to switch your account after the 'bonus interest' period, it makes sense to establish standard long term rates of these options before making a commitment.

This type of deal falls into two main categories, the 'accessible instant cash' type and the fixed term option. Instant cash, (or flexible deals) offer rates between 1.75 per cent on the low-tier options, moving up to 3.05 per cent AER on the better ones; although do remember that some of these higher rates are bonus offers that will eventually drop.

Minimum investments required vary from as little as £1 to £1,000 or more. Choices inevitably have to be made as to whether you can to commit to minimum investments in the higher band. As things stand , the maximum investment per tax year is capped at £5,340.

The capped figure is a tax incentive and it allows the interest accrued to be free from the taxes applied to an individual's other investments. This is one of the main advantages of the ISA.

The next high rate bracket is the short term fixed rate deal, which allows for a one year term during which withdrawals may be made. In some instances these withdrawals may nevertheless be subject to penalties, others may be or may claim to be penalty free. It pays to check carefully.

The saver is usually required to invest a minimum of £500 (in some cases £1,000). The top four choices in this group currently offer rates between 2.6, 2.8 and 3.2 per cent. All of them accept transfers from sources other than direct input of funds.

The second group of choices offers deals over a two-year term. The two top offers in this group offer AERs of 3.7 per cent at a minimum investment of £1,000, while several accounts that can be opened with as little as £100 offer 3.35 per cent. On the whole, these deals can be attractive, especially considering that the lowest AER in the top group of eight possible choices pays 3.3 per cent.

Group three contains the long term opportunities, usually involving a minimum three year term. Some of the bestdeals offer four per cent, which is comparable to the rates of some savings bonds. These rates are fixed for three years; a good thing if rates happen to drop generally during that time, although clearly not so favourable if the opposite happens.

This does seem an unlikely occurrence in the near future. While the overall economy may be improving slowly, there is a long way to go before interest rates are likely to be raised significantly.

With most of the long term deals, investors are required to set aside minimums of either £500 or £1,000, as is the case with the two top offers. None of these choices offer account holders an opportunity to access funds until the full term has been completed.

If, for instance, money is to be set aside for a child's education, there are a variety of possibilities in the shape of savings for children. While some of them require regular deposits of £10 for a year, others can be started with as little as £1 and can either be taken as instant access deals or fixed term deals that do not allow access up to the child's 18th birthday.

Bonds are also a consideration, although many of them require rather high investments to start with and are consequently more suitable for high income individuals. It's important to note that the funds are not accessible until end of term.

This type of investment should therefore be approached only if you are sure that funds will not be needed during the term.

Consider your options carefully and remember that you final decision must suit your individual circumstances.