Your car breaks down, a pipe bursts in your home, you become ill and need to visit the hospital or you lose your job suddenly. You have an emergency expense. This is why you need an emergency fund!
What is an Emergency Fund?
An emergency fund is money that is set aside to deal with life’s unexpected emergencies.
The £850 emergency expense crisis: How one-third of Great Britain is unprepared for financial emergencies
A recent survey of British people was conducted.
They were asked, ‘Could your household afford to pay an unexpected, but necessary, expense of £850?’
This is how they responded:
- 57%, said yes, they could.
- 32% said no.
- 9% said they didn’t know
- remaining respondents said they would prefer not to say.
Why one-third of people cannot pay £850 for an emergency expense
The cost of living crisis
The increased cost of living is a major factor as to why people struggle to come up with £850 in the event of an emergency.
The same ONS survey found that among all adults surveyed, 51% said that their cost of living had increased compared to only one month previously.
95% of these respondents said that the cost of food had increased, followed by fuel increases and gas or electricity bill increases (both at 57%).
This was followed by a rent or mortgage increase (28% of respondents) and an increase in the cost of public transportation (19%).
Lack of savings
The increases in the cost of living have depleted people’s savings or prevented people from even saving in the first place.
Low Incomes
People on low incomes have difficulty saving £850. The ONS found that adults with a personal annual income of up to £10,000, had 3.8 times higher odds of experiencing financial vulnerability compared with adults earning £50,000 or more per year Source: ONS press release July 14, 2023
Solutions to the £850 emergency expense gap
Response to the cost-of-living crisis
In the ONS survey, respondents said they were doing the following in response to the cost-of-living crisis:
- spending less on non-essentials (67%),
- shopping around more (50%),
- spending less on food shopping and essentials (45%)
- using less fuel e.g., gas or electricity in the home (44%)
- using their savings (33%)
- cutting back on non-essential journeys in their vehicle (32%)
- making energy-efficient improvements in their home (21%)
- using credit more than usual e.g., credit cards, loans, or overdrafts (18%)
Using more credit is a worrying trend
According to The Money Charity
“At the end of June 2023, outstanding consumer credit lending was £215.2 billion, increasing by £1.3 billion on the revised total for the previous month and £12.1 billion more than in June 2022.
Within the total, outstanding credit card debt came to £66.4 billion, an increase of 8.2% (£5.0 billion) in the year to June 2023. Credit card debt averaged £2,363 per household and £1,248 per adult.”
The Money Statistics, The Money Charity, August 2023
The use of credit to simply make ends meet is a worrying trend and unsustainable. It could lead to:
- the snowballing of high-interest debt, such as on credit cards.
- defaulting on payments which could lead to county court judgements and the person’s credit score being ruined.
- increasing the stress and anxiety levels of those who are carrying a heavy debt load.
Those on a low income who cannot cover an emergency expense
For those on a low income, they may be able to apply for government support such as:
- Universal Credit: A monthly payment to help with living costs, such as rent and bills.
- Income Support
- Housing Benefit
- Council tax reduction
- Free school meals: Your child may get free meals at school if you are on a low income.
Is £850 enough for an emergency fund?
Well, it depends on the emergency in question and your daily living expenses!
Would £850 be enough to cover materials and labour in the event of a burst pipe in your home? Probably.
Would it cover 2 months of expenses if you lost your job? Unlikely.
The rule of thumb is you should have 3-6 months of emergency expenses sitting in an easily accessible high-interest savings account.
However, with inflation still at 6.8% (Source: Bank of England), it is increasingly hard for people to pay for the basics i.e., a roof over their head, food on the table etc. let alone save for an emergency fund.
How to save for an emergency fund
Identify your emergency fund figure. 3-6 months of living expenses would include mortgage/rent, utilities, food, and transportation.
Cut out all unnecessary spending, e.g., limit or avoid eating out, cancel unused subscriptions.
Identify how much you can save per month.
If you have cut your expenditure to the bare bones and still can’t save anything, you could:
- try getting a better-paid job.
- take a second job.
- sell stuff that you don’t need.
- if you are renting, you could move to a cheaper flat or move into a flat/house share.
- if you own your home, you can rent out a room or multiple rooms in your home under the government’s ‘Rent a Room Scheme’ where you can earn £7,500 per year tax-free. However, if someone else is also renting out rooms in the same property, such as a joint owner, the amount is reduced to £3,750.
To save money, consider setting up a direct debit to automatically deposit the money into an easy-access high-interest savings account. This will help you reach your target figure over time.
In Summary
The cost of living crisis has presented significant financial difficulties for many people. Therefore, many struggle to save £850 for an emergency let alone the recommended 3-6 months’ worth of expenses for a full emergency fund.
By reviewing your monthly expenses and cutting out unnecessary expenditures, you may be able to save more money. Gradually set aside this amount of money until you build up your emergency fund. It will give you peace of mind and help you sleep at night.
Additionally, if eligible, you should also explore what government programmes are available to provide you and your family with additional financial support.
DISCLAIMER: Inquisitive Finance operates on principles of exchange of knowledge, ideas and opinions and learning in the community. Your decisions are entirely your own responsibility, and I am in no way responsible for your actions. I am not a financial advisor. Whilst I strive to provide accurate and up to date information, I make no warranties or representations as to the accuracy or completeness of this information. Use common sense, do due diligence and where necessary, use the services of a licensed financial advisor, before making any financial decision and/or transaction.
With the current inflation the ‘buying power’ of money is not great. Must agree that in a crisis when people are struggling to pay for food and energy, £850 is a significant amount to have for a rainy day ….
Statistics so unemotionally reminds us of the economic reality.
Yes, inflation, at 6.8% in the UK, is eating away at people’s purchasing power and making everyday basics such as food more and more expensive. Agree that when people are struggling to keep a roof over their heads, food on the table and the light and heat on it’s difficult to even contemplate saving £850.