Do I Need an Emergency Fund?

do i need an emergency fund

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

12 Comments

  1. Emergency funds, you can’t argue with the logic but I didn’t like having a couple of grand sitting in a bank account doing, and earning, nothing. Not when I can access funds from my Fidelity investments within a week. Everyone can wait a week for payment, or a credit card can help out or even the bank might give a short term overdraft. So my emergency fund ended up in my investment portfolio.
    As for insurance, I only take the basics. My brother (self employed roofer) had a massive fight on his income insurance when he damaged his back and the insurer initially refused to pay – said he “must have known” he was vulnerable to that type of injury. You really have to read the small print on those agreements.
    Holiday insurance – I always take that and have had to use it several times over the years.

    1. Yeah those insurances can be a nightmare to try to claim on. Some are worse than others – critical illness cover is apparently the worst.

      I use my investment account for annual expenditures e.g. car insurance, car tax, membership fees, etc. But we were lucky enough to get NS&I index-linked certificates back when they were good (and still available, obviously!). Now that inflation is almost non-existent, they are less good, I’ll admit that, but they’re 100% guaranteed, or as close to that as is possible.

      Thanks for stopping by, as always it’s good to hear your thoughts

  2. You share the same philosophy on E-funds as I do M.

    I keep roughly 3-4 months worth of spending my fund in easy access high interest current accounts. I’m fortunate in that I don’t need to worry about redundancy however household or car emergencies are still potential disasters waiting to happen. I’d rather not have to rely on credit cards to bridge any gaps and I’m sure you’ll agree that knowing you can cover whatever bill that comes in is a really great feeling.
    FIbrarian recently posted…FIbrarian hits the gardenMy Profile

    1. Yes you’re right, that peace of mind is really useful! I think we don’t need to worry about redundancy either, however you can never be too sure I think. That’s another bonus of building up passive income from dividends and p2p lending as well as other sources – these allow you to replace your income gradually, very helpful!

    1. Good for you! It is a lot, and for some people it’d be too high, but whatever helps you be at peace and then get on with your life sounds good to me!

  3. Timely post as it’s something I’ve been asking myself recently.

    I’ve never had a proper emergency fund – I badly needed one during my spendy days but resorted to credit cards, paying off minimum amounts – yes, the horror of it and I didn’t know any better then, even though I should have!

    When I got out of debt, I still had no proper emergency fund (holidays I know are not emergencies!) and I used my credit cards again, only this time, 0% only, with strict and dedicated plans to pay them off before the 0% ran out. This is how I’ve been dealing with ’emergencies’ these past few years but I’m slowly coming round to the idea that an emergency fund (or funds) is/are needed. I’ve started saving this month, pitiful but a start!

    I’ve been toying with the idea of income protection insurance – quite apt with what’s happening at work. Since I don’t have months of ready cash equivalent to my income, I will be have to consider this , probably for short-term income protection. If I lose my job, I will have redundancy but I’d rather that go towards my pension than spend it.
    weenie recently posted…Uh oh, Pension Tension!My Profile

    1. Hey Weenie, thanks for stopping by.

      Wise decision to think about getting an insurance product. If we hadn’t managed to build up the emergency fund, we would have done this instead, despite my general feelings of not buying ‘extra’ insurances, I want some kind of protection either way. It’s understandable that you’d want to put the redundancy money towards your pension, I’d probably do this too if I were in your shoes.

      Why don’t you start saving up an emergency fund – just a one month buffer? You could leave a month’s salary in your current account, and then live off last month’s income, whilst this month’s is still coming in. This is something we’re trying to work towards at the moment.

      Cheers

      1. I’ve found that I’m better saving in little bits so will start just putting a small amount towards emergency funds each month. True, this could leave me short if an emergency arises while I’m still trying to fill the pot, in which case I fall back to my original plan which is the 0% credit card, but I’ll try to use that as a last resort.

        But yeah, just over a month’s (maybe two months) buffer is what I’m aiming for really in the first instance.
        weenie recently posted…Uh oh, Pension Tension!My Profile

        1. Good plan.

          We have cards too, so if an emergency happened we’d pay with those and then pay it back with the funds. We don’t have the 0% ones anymore though…

  4. Ciao TV,

    Emergency fund is a must for me, maybe 6 months is a bit too large for me now (3 is more manageable), but generally speaking I like to have it there. Same for insurances. When the request is not too high I tend to cover certain assets (house, car etc etc) the problem with the country where I live (Italy) is that insurance companies are always on the look for a reason not to pay a premium when it’s due… But that’s probably my experience that is negative.
    For example, last year I was someone tried to break into my house, fortunately I managed to recover some of the damage done as I was insured.

    1. Ciao Stalflare!

      Sorry to hear of your house break-in. That is a sad situation. It’s good your instance was able to cover things.

      I think your negative experience in general with insurance companies is not just in Italy though! We in England also complain about the same thing 😉

      Cheers

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge