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Life doesn’t always go according to plan, and unexpected expenses can hit anyone at any time.
Of course, if you’re bringing in money, a surprise payment isn’t a problem. But this is not the case for most people, if the car or washing machine breaks down, or you get fined for speeding, you have to find the money from somewhere. And that’s when you need an emergency fund.
A new survey by banking app thinkmoney It found that the average Briton has to pay at least two shock bills a year and these charges cost an average of £776 a year.
Car breakdown (44%) was the most common unexpected expense, with a broken washing machine (37%) coming in second and dental work (28%) coming in third.
Boiler malfunctions (26%) and rising vet bills (25%) came next, as well as needing an emergency plumber or electrician (26%). Other common financial hits were broken phone screens (21%), parking fines (20%) and roof leaks (18%).
Nearly half of the 2,000 (42%) British Most adults surveyed invested in savings to cover unexpected expenses, while 20% put it on credit cards, and one in 10 (10%) borrowed cash from friends and family.
Only 6% used their overdraft, while 3% either took out a loan, found extra work or used a buy now, pay later scheme.
“With the cost of living constantly impacting budgets, a financial blow is the last thing you need and as a result, it’s easy to bury your head in the sand and hope it doesn’t happen to you,” says Vic Layton, a consumer expert at ThinkMoney.
“Our data shows that the odds are not in your favor, so your best path forward is to plan for the financially unplanned.”
Half (48%) of those surveyed felt they were just one unexpected financial blow away from disaster, and more than a third (34%) said they had been forced into debt due to sudden spending. And while one in 10 said they were brought to tears when a surprise bill arrived, just as few (16%) said they regretted not putting money aside for unexpected expenses.
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But how much should you save if you have the foresight to build an emergency fund? Leighton points out that while there’s a lot of advice out there that suggests it’s a good idea to put away half your annual salary, the reality is that you probably don’t need that much.
“The classic advice to save three to six months’ salary for unplanned setbacks is a good idea in theory, but in the real world it’s just out of reach for many families,” she says.
“The risk is that it becomes so intimidating that people give up before they even start, because what would £50 do instead of six months’ bills?”
She recommends building a small safety pot for expenses like car, appliance and home repairs, and unexpected dental and vet bills, etc., and points out: “A smaller safety pot is not only more achievable, but it’s also the first step toward real financial flexibility.”
Leighton points out that round-up pots or top-up accounts that skim change from transactions can make savings invisible and painless, and says savers can accumulate emergency funds, with a mini-buffer for quick fixes like changing a tyre, and a longer-term pot for major financial setbacks like redundancy or health problems.
And she also suggests making sure that car breakdown cover and home insurance covers what you think it does, warning: “Although it is tempting to increase the excess amount of your insurance to reduce the annual payment, you should only do this if you can really afford the extra amount in an emergency, otherwise the policy is effectively worthless.
“Home insurance is a classic ‘set and forget’ until it suddenly becomes the most important document in your life.”
Check what your policy covers: Is accidental damage covered? Are you safe if your pipes burst, or if your cat knocks the TV off its stand? Can it cover your lost phone or stolen bike? “Knowing ahead of time can help you determine how much extra you’ll want to keep,” says Leighton.
Hayden Fisher, a chartered financial planner and regional manager Shackleton Consultantssays it is sometimes suggested to save three to six months of known household expenses, such as monthly mortgage or rent payments, utility bills, council taxes, etc., for an emergency fund.
However, he says this is not right for everyone, although it can be used as a baseline figure when taking other financial matters into account.
“Keeping six months’ worth of expenses in a cash-based account is a good starting point, with the goal of potentially keeping more if a person’s income can’t be predicted,” he says.
Additionally, Fisher suggests it is wise to think about any capital expenditures, such as vacations or buying a car, that are likely to come up within the next three to five years but will not be met by income. He recommends that any money set aside for such expenses should be put into more short-term savings.
and that’s not all.
“There are scenarios where you may want to have an even greater amount as an emergency fund, perhaps in retirement, for example if you are completely dependent on investment income,” he says.
Retirees can operate at a reasonable level of cash holdings based on the six-month spending rule, but then add a little more “in the form of a cozy blanket to make sure they can sleep well at night.”
Along with unexpected property and vehicle repairs and ad-hoc expenses, Fisher says an emergency fund can be a lifeline if there is a sudden loss in household income, or even to pay for a private medical procedure.
“I would suggest placing these funds in a high-interest savings account or cash ISA, where the money can be accessed in a shorter period of time, without any penalties,” he advises.