In a word, YES! Post over, we can all read something else now. Haha, only kidding. I just wanted to be a little light-hearted, because sometimes thinking about money and financial planning can get a bit dry (not for me, but for some people I guess it must).

Do I need an emergency fund?

Now that we know the answer to this question, I should probably go over why it’s a good idea – because there are alternatives, which I’ll talk about below. The first instance why having an emergency fund is useful is literally just for everyday emergencies. For example, it’s winter and your water pipes freeze – one bursts and floods your house – MAJOR EMERGENCY. Or perhaps (like us), your boiler is playing up and it’s approaching winter. You don’t want to go through winter with no heating or hot water! So you have money in your emergency fund to pay for things like this.

Most people who have blogged about emergency funds tend to write about job loss – that 3 to 6 months’ worth of salary saved into the emergency fund would help you not go broke whilst you were trying to find another job. Now, I am totally all for this, and we have got our 6 months’ worth of salary saved up long ago. It is now just accruing a small amount of interest, since we’ve not had any emergencies that were very expensive. We did have the corners of our roof and garage roof suffer damage in storms, but the repairs were only a few hundred pounds, so we didn’t think it was worth dipping into the emergency fund for such a small amount.

Should I get income protection insurance?

An alternative to having an emergency fund, particularly in the context of having/losing a job, is insurance. There are several types of insurance that could be applicable in an emergency which caused you to lose your job e.g. you got fired or you got a critical illness or other serious condition:

1. short-term income protection;
2. income protection insurance;
3. critical illness cover.

These are all slightly different in terms of what they cover:

1. short-term income protection covers you for a limited time (2 to 5 years typically) and is related to your income. It’s also limited in terms of which illnesses or situations it will cover;
2. income protection insurance is a long-term policy which will pay until you can start working again (or you retire or pass away), and will replace part of your income. It covers most illnesses, but doesn’t usually start until your sick pay runs out, however you can claim multiple times as long as you still have your policy;
3. critical illness cover  is a one-off payment, so it’s neither short- not long-term as it will only pay a lump sum once – if you have a very serious as well as specific illness.

Is insurance actually worth it?

I personally would not buy this insurance, but that is my own choice, and is according to several factors. Firstly, I don’t like paying for several extra insurances that are not legally required. For example, we have car insurance (legal requirement) and we have house insurance (requirement by mortgage lender). Other than those requirements, I don’t pay for anything else. Since we have an emergency fund, I feel confident that we would be able to come up with a plan, should one of us become seriously ill or incapacitated from working. We could rent out rooms in our house again, we could sell our house and move to a lower cost of living area, thus freeing up capital which could be used to provide income, or we could rely on friends and family to help us out.

For some people, they do not have any of these options available, so one or more of these types of insurances may actually be beneficial. They can be found through the comparison sites e.g. confused.com. It was our personal choice to save up the emergency fund rather than use insurances, as well as savings into some smaller savings pots that could be used for ‘everyday’ emergencies – this is how we were able to fix the rooves when they were damaged by storms.

Other types of emergency funds

We decided to start making a ‘household item replacement fund’, that is a small savings pot (i.e. nowhere near 6 months’ worth of wages), which could be used to replace a fridge for example. We will gradually build this up to include enough money to replace all our appliances or to do larger repairs/maintenance around the house. Having tangible items to which this savings pot is applicable makes it feel more important, and perhaps helps us to strive more to reach our goals. At the moment, we have less than £1000 in this pot, so that would not go too far if we had a large repair to do; however, since we have recently replaced our dishwasher and our washing machine is still under its original warranty, we have time to save.

Extended warranties – are they worth it?

Simple answer – usually not for small appliances e.g. fridges, TVs, etc. although on second-hand cars it can sometimes be advantageous to get one. On our last car, we could have had an extended warranty for less than £300 (I can’t exactly remember how much). Given that the model we had was renowned for certain expensive repairs, we probably should have bought the warranty. Of course, hindsight is 20:20, but we had already had a few weird problems that should have alerted us to further trouble down the road. If only we had bought the extended warranty, we could have had the problems fixed or the car replaced instead of losing over £2000 when we eventually had to sell the crappy old car to two dodgy guys from Essex, who were the only people who would buy it…

So it’s over to you – have you ever bought some kind of insurance or warranty for anything? Did you think it was worth it? Do you have an emergency fund? Let me know, leave a comment below!

image: bplanet/freedigitalphotos.net