I and my fellow personal finance community write a lot about the importance of an emergency fund. That pot of money set aside for emergencies, to get you out of a potentially expensive financial hole. But the question for many is firstly, how do I build this fund and what do I do if I don’t have that fund available and an emergency happens?
What is an emergency fund?
The amount that goes into an emergency fund is different for everyone. I like to think of it as pot of money that gives you comfort, having it set aside takes away worry and stressful thoughts. If something was to happen, you have somewhere to go to get at money. That something might be the car breaking down or the boiler needs to be replaced or maybe the roof needs to be fixed. These are jobs that maybe needs a few hundred set aside to pay for them. And the emergency fund is where you would go to pay for these.
An emergency fund can also be set aside for bigger emergencies, such as job loss or illness. This is process that I am going through at the moment, setting up a pot of this money. I know that to cover three months of expenses and bills I would need around £4000. I am aiming for an emergency fund of £5000, even more important for me considering the irregularity of self-employed income.
How to create that emergency fund
I am a huge fan of a saving app called Chip that saves money from my bank account each week, based on my spending and balance. If I have had a good week not spending much it will move say £20 across to my chip account. And will continue to do this automatically without me having to do anything. The chip account is controlled via an app, and the money is held safely in a Barclays savings account.
The money is building up steadily and is never taken in weeks where I cannot afford it. Once the money is gone I almost forget about it and have a slowly building emergency fund. And it came in useful at the end of the summer when an unexpected car bill came in. We were able to pay the bill using the emergency fund built up.
But what if you can’t do this?
Of course, I recognise that some people cannot afford to save that £20 per week or per month to start building that emergency fund. I have been in the position of not having any savings but needing money for an emergency and have personally used credit cards and overdrafts. These can be expensive ways to get at money.
I have a considerable credit card debt and often use my overdrafts to cover monthly spending. But I find using these there is no incentive to pay the money back and they can be expensive.
I have £4,000 sat on a Virgin Credit card that I cannot afford to repay in full. I just recently came to the end of an interest free period, they offered me another year at the 0% rate, but at a 3% cost to transfer the balance to the new deal. At a cost of £120. They are encouraging me to keep the debt for as long as possible. And I live with the uncertainty that that 0% deal could end, and I am suddenly paying large amounts of interest for that debt.
Similarly, overdrafts. My bank accounts are often in overdraft and I have almost got used to it and just pay the monthly charge unwittingly. These monthly charges can be huge depending on whom you bank with.
Many people turn to short term loans or pay day loans if they have an emergency. The worst form of money lending with loans that will cost you so much to repay. A pay day loan might have an APR of 500%, meaning you end up paying back far more than you borrowed. I am very anti-pay day loan, there are always other cheaper options to consider than a pay day loan company.
There is another way
I recently had a meeting with Neil Kadagathur the founder of Creditspring. A company keen to change the way the lending market works. This product has been in development for a couple of years and Neil and team have researched the product area thoroughly and have engaged with debt charities as well. They have a strong advisory committee including a highly regarded economist, a Fintech founder and several finance professionals.
I quote from their website “we are determined to improve things and provide people with a product that can be easily understood, is affordable and most of all, helps them better manage unexpected expenses so they can stay in control of their lives”
Creditspring have launched a brand-new product offering access to interest free credit. They are doing things a little differently. You pay a monthly fee of £6, just like an insurance premium, to have the ability to access two loans of £250 per year.
Just like car insurance, where you pay a premium of maybe £25 per month to cover your car in the event of an accident. Here you pay the £6 per month premium to have access to an interest free loan.
If the washing machine dies and you quickly need a new one you can apply for the money from Creditspring. The £250 borrowed must repaid in four monthly instalments, with no interest charged on that emergency loan.
An alternative to expensive lending
If you are in a position without access to an emergency fund, then this could be an option for you to consider. And it going to be a much cheaper option than a pay day loan.
This is a collaborative post with Credit Spring. Representative example: £500 in credit over 12 months. 8 monthly repayments of £62.50 and 12 monthly membership fees of £6. Rate of interest 0% p.a. (fixed). Representative 87.4% APR. Total amount payable £572.