How to be prepared for a financial emergency
If you don't have enough savings to fall back on, you should take action now to protect yourself from an unexpected bill.
A third of us are living on the financial edge with no savings whatsoever, according to new research by the Money Advice Service.
Yet over two-thirds of us faced unexpected costs last year, having to find an average of £1,101.
The three most common unexpected costs were: car repairs, optician’s bills, and technology that needed urgent repair or replacement.
Worryingly, a quarter of us would either have to get into debt or increase our debt if we were hit by unexpected bills.
And, unless you can rely on family or friends, getting hold of a decent chunk of cash fast will cost you.
Financial expert Andrew Hagger of moneycomms.co.uk worked out that the cost of borrowing just £400 varies by nearly £130, depending on whether you have a cheap credit card or have to resort to a payday loan.
So it’s better to be prepared in case of an emergency. Here are two ways to make sure you have money on hand for a rainy day.
Save for a rainy day
The classic received wisdom is you should have the equivalent of three months’ salary tucked away in case disaster strikes.
To make that a bit more palatable, the Money Advice Service says those of us without any savings should try to put aside £3 a day. That’s £1,095 a year.
That could mean you need to give up your coffee shop trip on the way to work or cut back on a few pints or glasses of wine down the pub.
Our free budgeting tool MoneyTrack can help you see where you’re spending and look for things to cut back.
If you prefer good old pen and paper, write down everything you spend in a month, right down to the odd chocolate bar or newspaper.
Even if £3 a day isn’t realistic, try to save what you can.
Where to put your savings
Once you have got some savings building up, don’t just hide them in a coin jar or in a drawer – start earning interest on them.
The best place to look for a decent rate right now, with instant access to your money, is a current account.
Nationwide's FlexDirect account pays 5% interest on up to £2,500, providing you pay in at least £1,000 a month into your account (so you might need to make it your main current account).
Clydesdale Bank and Yorkshire Bank both pay 4% on up to £3,000 until March 2015, again so long as you pay in £1,000 a month.
Or, if that sounds too complicated, you could use your tax-free Cash ISA allowance, particularly if you think you won't be able to use otherwise.
Here are the top interest rates available right now on smaller amounts:
|
ISA |
Interest rate |
Minimum deposit |
Access |
|
Stafford Railway Building Society Cash ISA |
1.75% |
£1 |
Branch, post |
|
Britannia Select Access Cash ISA |
1.75% |
£500 |
Branch, post |
|
Darlington Building Society Cash ISA |
1.70% |
£1 |
Branch, post |
|
Kent Reliance BS Easy Access ISA |
1.70% |
£1,000 |
Online, branch, post |
The other great thing about an ISA is, if you don’t use the money, you can move around in the future to get a better rate. And the tax-free benefit is yours for as long as you have the money.
If you do want to use your ISA allowance, here are the top rates on instant access savings accounts:
|
Savings account |
Interest rate |
Minimum deposit |
Access |
|
Britannia Select Access Saver |
1.50% |
£500 |
Branch, post |
|
Kent Reliance BS Easy Access Savings |
1.45% |
£1,000 |
Online, branch, post |
A contingency credit card
If you really can’t save up a decent emergency fund, then think about getting a credit card so you have something to use in emergencies.
If you have a decent credit rating, then you could get one with a representative APR (the annual combination of interest rate and any other charges) of 7.8%, such as the Tesco Bank Clubcard with Low APR card or the Sainsbury’s Bank Nectar Low Rate card.
And if you do get hit by a bill, you could always transfer your debt onto a 0% balance transfer credit card.
If your credit rating isn’t so great, then shop around for a card with as low a representative APR as you can. Credit builder cards such as the Aqua Classic (29.7% APR) and the Vanquis Bank Aquis card (29.8% APR) are at the lower end of this spectrum.
If you have difficulty resisting the temptation to spend on a card, then you could freeze it in a block of ice in your freezer or give it to a trusted family member or friend to keep hold of. Just be sure you can access it quickly in an emergency.
While it’s better to save for a rainy day, a credit card is a far better borrowing option than a payday loan. This is not only because the cost is far cheaper but because many payday lenders won’t lend you more than a few hundred pounds.
More on saving and budgeting
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Comments
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I save. I always have, more than anyone else I know, other than my parents. Partly, I have long-term health problems and never know how long I may be able to keep working or what might change in the future. I've never taken any benefits. However, the people I know with similar health problems who have been forced into unemployment live very precarious, marginal existences. They would be thrilled to receive "barrow loads of dosh" but absolutely don't. They would also be delighted to get back into work but are unable to do so, without help that they are clearly unable to afford. Even if they had had substantial savings, they would have been used up long ago on basic subsistence. As a saver, I always feel demoralised when I read the comments on places like LoveMoney, with many lifelong savers feeling that it is no longer worth it. I don't know whether this is deterring people from building up even small emergency funds, but I don't think the Money Advice Service is wrong to try to promote this message. However, I think Overtone is right that many people are too stretched even to build up minimal savings.
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fenemore has hit the nail on the head. Those who save are subject to confiscation of their savings until they become impoverished. Then they get the full Monty the state can provide at other tax payers expense. So logically, many folk begin to think 'Why bother?'. Let's have fun now while we can and don't worry about the future. Savings accounts and pensions are now fair game for governments short of cash. Look at Cyprus! Check out what Argentina has done to savers. Look what Gordon Brown did to pension funds. Look at the general rate of earned interest compared to inflation. More and more people are beginning to feel that saving is a mug's game. It's up to the powers that be to change that mindset by changing their approach. Don't hold your breath though.
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[I]A third of adults have no savings whatsoever[/I] - I am shocked, even stunned by this statistic. Even the suggestion that everyone should have 3 months pay in hand I find totally inadequate, especially in these days of job insecurity. Perhaps there is something else going on here? Maybe its not that people haven't saved, but more a case of "what's the point?" when you know that the State benefits only kick in once you have used it all. "Doing the right thing" in this country just gets you penalised, whereas if you lived life to the full and blow every penny, the State steps in with barrow loads of dosh. Sensible frugal onlookers can only gasp in disbelief as they see their spendthrift neighbours continue to live at the taxpayers expense!
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09 February 2014