Avoid the financial drama - A five-step plan to preparing for a financial emergency

Life has a habit of throwing curve balls. The car needs a new tyre, your boiler breaks down, or a family member suddenly loses some income... financial shocks can be hard to see coming.
There’s no way to know what the future holds, so it’s best to be prepared for whatever’s thrown your way. Should you find yourself unexpectedly facing a final emergency, being prepared can make a huge difference and prevent you from getting into debt. 

So, what are these five simple steps?

Step one - Build a ‘starter’ emergency fund of £1,000

To build your confidence and make sure you don’t need to rely on debt when something unexpected happens, focus on saving £1,000 in an accessible savings account as quickly as possible. Here are some quick ways to begin your fund:

• Sell unwanted possessions online - Vinted or Depop are two good options for clothes while eBay, Shpock or Facebook Marketplace work well for tech or everything else!
• Check if you qualify for a hardship grant from your local authority. Each council runs their own scheme and the support available can vary - find your local council here 
• Visit entitledto.co.uk to ensure you are getting all your state financial benefits 
• Be a smarter shopper - here are some tips to make sure you outsmart supermarkets’ tricks to get us to spend  
• Consider other ways to bring in income - if you have a skill you think you could sell, you could look at signing up with Fiverr as a freelancer

Step two - Review your spending and cut ruthlessly

To assess how much you really need in case of a financial emergency such as a drop in income, you have to work out how much you need to get by. This is what we call essential living costs.

Add up your housing (rent, mortgage, utilities), food, insurance, debt repayment(s), childcare and transportation expenses. Don’t forget to also take into account personal expenses such toiletries, haircuts and clothing.

Part of reviewing your spending is working out what unnecessary costs you could cut - so many of us have subscriptions we don’t use or need, or maybe your household has more than one Netflix account? 

Here are other things you can do to reduce your spending:  

• Check you are getting the best deal on utilities - check out comparison websites like Cheap Energy Club for gas and electricity or Compare the Market for all other utilities
• Make sure your mortgage deal is competitive - Moneyfacts, MoneySuperMarket or Which? can help you understand whether you should switch to a better deal
• See if you could benefit from consolidating your debt with a salary-linked Salary Finance loan 
• Check you are getting the best deal on your insurances - here’s a quick guide on how to buy insurance using comparison sites
• Check your tax code is correct and ensure you aren’t overpaying income tax - click here to start the process

Step three - Prepare for the worst

No one likes to think about becoming ill or having a life-changing accident, but unfortunately it’s an important thing to consider. If you find yourself in a situation where you can’t work due to a long-term illness or disability, or you die leaving dependants, you need to make sure you have enough financial support and your affairs are well organised.

What do I need to do?

• Check that you have enough life insurance through your job and personally to repay loans and provide financial support to any dependants - think about how much cover you need, considering your mortgage if you have one. 
• Check what long-term sick pay your employer provides - if the sick pay provided by your employer is not enough to cover your essential living costs (identified in step two) then it may be worth taking financial advice on buying income protection insurance 
• Put in place a Will and also a Power of Attorney to enable someone you trust to deal with your finances in the event that you are unable to. Fairwill can help you do both. 
• Make sure you inform your employer or workplace pension scheme of who you’d like to be your beneficiaries to ensure they receive any death in service payments.

Step four - Build a ‘fully loaded’ emergency fund

To build on the £1,000 starter amount you created in Step one and work out how much you need to have in your ‘fully loaded’ emergency fund, take the total of the essential monthly living costs you identified in Step two and multiply by between 3 to 6. You need enough to make sure you can meet your essential household living costs if something unexpected happens or you experience a drop in income.  

For example, if your total essential monthly living costs add up to £1300, your ‘fully loaded’ emergency funds needs to be between £3,900 and £7,800.

The size of your ‘fully loaded’ emergency fund will depend on a range of factors, including the security and stability of your household income, amount of monthly essential expenses, and your personal preference. 

Step five - Make it easy for yourself

To avoid any temptation to dip into your emergency fund, it’s a good idea to ‘pay yourself first’ through a standing order or salary deduction into a designated savings account. By saving directly from your salary, you may be able to build your emergency fund without the hassle. 

We hope this simple 5-step guide will help you feel better prepared for the future - a little planning and preparation can go a long way at helping us build new money habits! 

To find out more about the financial support available to you, click here and select your employer.