Nobody likes to think of themselves falling into financial difficulty, but it is best to be prepared in the light of an emergency. A financial emergency could be due to a health issue, it may be related to work – whatever the reason, it can catch the best of us off guard. Car repairs, broken boilers, flooding at home and medical bills are just some of the main causes of financial emergencies in the UK.
In the United Kingdom, we are lucky enough to have access to the NHS and so in most cases, we are covered for medical emergencies. However, not every solution to every medical problem is offered by the NHS and if you want to go privately for a medical complication, you will want to have the fund to back this up.
A financial emergency is essentially anything that causes a sudden chance in your money situation. You need to be prepared for this change in cash flow, should it occur, and you should also prepare for if your income ceases to exist for a period of time.
An investigation conducted by the Post Office found out that the typical family in the UK relies on around £2,428 per month to live comfortably on. If that money were to be reduced, a typical family would only be able to maintain their current lifestyle for around about two months.
The investigation continued to show that a family with a household income of £3,156 per month and a savings account with £10,741 in it would only be able to maintain their current lifestyle for 46 days. In these examples, however, both the case studies showed that the money went from their current wage to zero.
It is concerning how many people would only be able to maintain their lifestyle for a number of months, to avoid this preparation is clearly key.
It is best to split your financial emergency plan into three, clear parts:
Saving can be very boring – but it is your safety net for a financial emergency. If you refer back to the example where the family had around £10,000 in their savings and were only able to maintain their lifestyle for 46 days, this is not very long in the grand scheme of things.
It is advisable to make a budget, taking into account all of your monthly expenses. This way you can get an idea of what money you will have left over after all your financial obligations are paid off. Work out what you are going to be able to live on from this amount and then deduct an amount to transfer into a savings account. 3 months of your salary put away as savings is a good place to start.
Taking out insurance policies are important for ensuring that you stay financially sound. Life insurance or critical illness cover is something you should consider to help your family out in the event of an unsuspected death or illness.
If you need to borrow money short term for an emergency, there are options available. Probably the safest and fastest way to do this is to borrow from family and friends. They will typically want to help you in your time of need and be very flexible when it comes to making any repayment, if any is required.
A less popular option is to apply with payday lenders – the very high cost loans can be potentially funded in less than an hour if you meet the criteria, but this does come at a cost and a responsibility to repay at the end of the month.
There is also the option of the two, where you have your parents or friends act as a ‘guarantor’ for you – so they will co-sign your loan agreement and help you access funds. The catch is that your relative or friend will be required to cover payments if you cannot.