One of the basic building blocks for a realistic personal financial plan is an “Emergency Fund”; six to twelve months of take-home pay, held outside of your current account but accessible in real need. Typically for our clients, this would be an instant access cash ISA, money in a Credit Union or money on deposit in a bank.
Why? You need to be able to cheaply access what you need to offset a disaster that affects your ability to earn money, keep a roof over your head or keep food on the table while you sort yourself out. Borrowing money short term can be hugely expensive, damaging to your credit rating, damaging to your self-esteem and even ruinous to the point of bankruptcy, if things go really badly.
Two articles on the BBC website touch on this point with the first, here, explaining that 16 million adults in the UK do not even have £100 saved. In some areas, more than 50% of the adults have little or no savings, so a minor disaster like the car not starting or the washing machine breaking down will have a major knock-on effect. Having to rely on credit cards, payday loans, log-book loans or, worse still, the local loan shark just to keep life moving will ruin finances for months or years to come.
The second article explains that people born in the 1980’s, here, have half the accumulated wealth as those born in the 1970’s at the same age. ‘Generation Rent’ rents because they cannot save up for a house deposit and house prices appear to be running away from them. As their finances are so precarious, they need to understand how to make the best of what they have.
It is often said, (especially in the USA), that people are often only three pay cheques from the street; not being able to work with a broken leg, falling out with your partner or your car failing to start and having no cash for the bus or repairs could rapidly lead to expensive chaos.
Having an emergency fund not only keeps you out of the clutches of the loan sharks, (from the legal 1000+%APR of the payday loans to the ‘£1,000 now or your knees will be done’ jacketed hard men), but will also allow you to access longer deferred periods for income protection insurance, keeping the premiums down.
Do not let the size of the recommended Emergency Fund put you off; little and often is the best way to save, so put £20-50-100-200 a month into an account away from your current account and leave it alone for as long as possible. Once you have a suitable emergency fund, talk to us about savings and investment, as once you have a good savings habit it can get addictive, (in a good way).
If you would like to know more about how we can help you plan and realise your financial goals then contact us at email@example.com or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.