One of the foundations of good money management is having an emergency fund.
The rule of thumb is to put aside 3-6 months’ of essential bills i.e. housing costs, household bills, food and work travel costs.
The reason being that if an unexpected bill comes your way, you have money that can cover it instead of having to get into debt (using a credit card or taking out a loan) to pay that bill.
If you're finding it overwhelming, start small and build up just a month worth of essential bills for now.
Once you’ve built up your emergency fund to a level your comfortable with, it can just sit there giving you peace of mind that you can rely on it if you need to.
How much you personally need may depend on your lifestyle
It really depends on individual circumstances, but there are some lifestyle factors that could make you more or less likely to draw on your emergency fund.
Homeowner vs renter
If you own your home, you’re responsible for maintaining everything in it. So if something breaks, you’ll be the one to pay for it.
Common uses of emergency funds for homeowners include paying for a broken boiler, broken washing machine or plumbing issue.
And if your appliances or plumbing is getting on a bit, it’s even more likely a problem will develop. If you’ve got a protection plan in place this could reduce your reliance on the emergency fund. More on that later.
If you rent, then your landlord will be responsible for any maintenance issues (unless otherwise stated in your tenancy agreement).
So problems with built-in appliances, plumbing or electrics won’t need paying for by you.
If you're in a secure job or work in an industry where talent is in demand, then if you lost your job, you may not be out of work for that long.
Of course, nobody can predict the future. But certain types of work - particularly freelancing where income can be irregular - may mean that a larger emergency fund is more appropriate.
Check your notice period at work and any redundancy entitlement - even if you lost your job, you may still get a good chunk of income before you leave.
Many people think that if they had to take a long amount of time off work due to illness, then statutory sick pay would cover their bills. But you'll only get £109.60 a week for up to 28 weeks. That's around £440 a month...it will barely touch the sides.
Do you have a history of taking a lot of sick days at work? Are you concerned about your future health, perhaps because of a family history of illness?
And if you're particularly worried about this, an alternative to an emergency fund could be a form of income protection insurance. This is where you pay a monthly premium to an insurance provider in return for a payout if you were unable to work due to sickness. Similar to a life insurance policy.
If you own a vehicle and you’re budgeting properly, then yearly expenses like insurance, MOT and servicing should already be accounted for.
But that still leaves unexpected problems. Common issues include flat tyres, dead batteries and bumps and scrapes that cost less to fix than the insurance excess for making a claim.
And if you did fail to budget for a big yearly expense like your car insurance, then this will be coming out of your emergency fund too.
For people that don’t own a vehicle, it’s one less potential added expense to deal with.
People with children
Kids are expensive even when you’ve budgeted for all the stuff you need to buy them.
Kids are also unpredictable, clumsy and just figuring things out as they go. Which inevitably involves making mistakes. Some of them costly.
So if you have children, I’m willing to bet your first bill to pay from your emergency fund will be for your child. Think (expensive) emergency dental treatment because they had an injury during school sports. Or they spilt something on your carpet and you needed to hire a carpet cleaner. Or they paid for gaming purchases on your iPad without you realising!
And here are a few (hilarious) specific examples I gathered from a poll:
“My son took a poo in the tumble dryer…turns out the motor didn’t like it!”
“Daughter decided to paint my car with fence paint.”
“My son managed to put a dining chair through the fish tank…oak floor ruined.”
“My kid broke a glass shopfront…I ran and left my husband to deal with.”
“My son decided to cut up my curtains…then try to stick them back together with blutac!”
“My son pulled a radiator off the wall having a tantrum.”
“My son poured Vimto into the dryer and turned it on.”
“My toddler chucked a piece of coal from the fireplace at the TV and smashed it.”
People with certain characteristics
Not limited to:
Clumsy – dropping things
Bad tempered – hitting things in anger
Forgetful – locking yourself out the house
Unorganised – missing payments or leaving things to the last minute
Boisterous - being too rough with things
All of these things can lead to breakages and mishaps. If you’re any of these things, they may cost you more than you bargained for. Personally, I've broken a few household items over the years through clumsiness or losing my temper.
The age of your possessions
If most of your possessions are new and things go wrong through no fault of your own, then they will probably be covered by a guarantee or warranty.
For things like electrical items, a standard guarantee is around 1-2 years. But you could get up to 3 years free guarantee if you shop smartly.
So let’s say you’ve got a new washing machine. You bought it in November 2020 and it comes with a 2 year guarantee. If it develops a fault (that you didn't cause) at any point between then and November 2022, the retailer is responsible for repairing it at no cost to you.
But let’s say you break the door with excessive force or your child damages it – regardless of whether or not it was actually accidental – it most likely won’t be covered by a guarantee.
This is where extra protection could come in handy.
Check what your contents insurance already covers
You should be getting basic home contents insurance to protect your belongings against theft or damage from fire and flooding.
I made this mistake a few years ago when our flat was broken in to. Luckily the only valuable thing stolen was an iPad but it was still hundreds of pounds to replace the stuff that was stolen.
If you’ve got individual items worth over £1000, make sure to declare these separately when taking out your contents insurance policy.
Some policies may include a level of accidental cover on things like TVs and laptops, but always check the wording carefully and ask the insurance provider for clarity if in doubt.
Consider accidental damage cover – but do your research carefully
For specific items or general cover
Another option is to pay extra to include accidental damage cover. This could be for a particular item – like a laptop or washing machine – or general accident cover that’s attached to your basic home contents insurance.
Again – do your homework. Buying insurance is a bit trickier than just doing a quick price comparison and going with the cheapest provider. Make a note of all the things you think you (or somebody else in your household) are most likely to damage, including how it might be damaged - insurance terminology can be full of bizarre restrictions e.g. covered by water damaged but not by scratching.
And check the excess per claim – in many cases the excess might be more than the cost of fixing the item.
Insurance policies can often be annoyingly vague and open to interpretation. The last thing you want is to pay extra for a policy that voids a claim you thought you were covered for.
If you're not confident that paying for extra protection will help you, then it's best to simply keep your emergency fund as a form of 'self-insurance'.
Factoring in all of these different scenarios, let’s compare two people.
Lives in a rented flat
She doesn’t own a car
She has no children
She has basic contents insurance + mobile phone insurance (including accidental damage)
She has a mortgage on her flat which she’s lived in for 6 years
She has a 5 year old car
She has a 4 year old child
She has basic contents insurance
On the face of it, I would expect Sara to be dipping into her emergency more regularly than Sarah. This is because Sara simply has a) more things she is responsible for maintaining (and that could result in unexpected costs) and b) older things at greater risk of needing repair/replacement not covered by insurance.
An emergency fund is all about peace of mind – knowing that you have cash reserves to draw on when life gets in the way.
And for some, life may get in the way more often than others.
So first of all, focus on building that emergency fund. Then simply be aware, factoring in all of the things raised in this article, of how often that cash might need tapping into.
And remember: whenever you do have to dip into your funds, focus on filling them back up. Don’t let them drain down, expense after expense.