What is a financial safety net and why is it important?
A financial safety net is a savings account that you should only use in an emergency, like when you’re evicted or your car falls apart. When you’re in a sticky situation like that, your life will be stressful enough without running out of money. That stress could lead to you losing your job and the money worries from unemployment can break up a marriage. It might seem unthinkable for all of this to happen at once, but the domino effect of a traumatic experience will take you by surprise!
Your safety net is exactly that - something to catch you on the way down and help you make the most of a bad situation. It could be the difference between having a few months to find your dream job, or a life in debt. You might think ‘it’ll never happen to me!’, but from recent personal experience, when it does, that safety net can really save the day!
Unforeseen circumstances and how much they could cost
Average UK Costs (without insurance)
- Car repairs - £67/hour for labour
- Boiler repairs - £259 for new circuit board
- Divorce fees - £550 just for the legal bit
- Vet fees - £810 per treatment
- Burglary - £2,833 for loss and damage Looking at the list, you might think that insurance will cover you for many of them, but insurance claims are often complicated, may fail and can take a long time to pay out. It’s safer to build up an extra layer of security by putting aside money in a rainy day fund.
Short term emergency loans and guarantor loans are just two of the options available if you’ve not been able to put enough aside. However, taking on more borrowing when you’re already struggling is a really bad idea and can end up pushing you towards missed payments and a very bad credit rating! You’re better off borrowing money from family and cutting back to make ends meet.
Working out your own financial safety net
According to the Money Advice Service, a good rule of thumb is to put together a fund that can cover three months of household expenses. If you’re living with a partner, remember that this doesn’t include their earnings. You should have a separate safety net that means you could survive without their income for three months, all on your own! It’s also important to put the money somewhere that’s easy to access - don’t lock it away in a savings account that you can’t open in an emergency.
The truth is, the amount you’ll need to save is hard to work out. If you’ve got a specialist job, it might take a while to find a new employer, or if you’re injured in a car accident, you may take months to get back on your feet. However, putting all your money in a safety net means you won’t be able to afford the security of getting your own home or paying for a reliable car. Use your common sense. The Money Advice Service suggests up to 6 months’ pay is a good enough amount for an emergency fund.
How to create a financial safety net
It might seem like a massive problem, creating an emergency fund from scratch and it’s obviously very expensive. Make sure you’re earning interest on the money, so it’s not just sitting in a pile, losing value each year. You can either pay what you can afford each month, or use an app like Chip or Plum, which work out how much to save automatically.
There are two options for setting up your savings in a financial safety net. One idea is to pay all your bills and unexpected expenses from the same place, which could be a second bank account. You would have to build up the amount of money, so it’s worth finding a bank that pays interest on current accounts. You could use a prepaid card or app-only bank for day-to-day purchases, to keep you on a budget. The other option is to pay into a separate savings account that you won’t touch except in emergencies. There are advantages and disadvantages to both ways of doing it and I use both at the same time!
Your options when you’re in need of emergency financial support
If you’re thinking about emergency loans, there are cheaper and safer ways of getting quick cash, like borrowing from family or close friends, but these might not be an option for you. If you’re falling without a financial safety net, you can apply for emergency loans online, but it’s best to compare your options before applying. If you’ve got a 0% purchase rate on your credit card, you won’t be charged interest during the introductory period, so this could be a useful way to avoid taking out costly loans.
If you find yourself searching for ‘emergency loans bad credit’, or ‘how to get an emergency loan’, you may be better off speaking to the Money Advice Service. They’ll let you know which adverts are scams and should be avoided! You can compare loans from regulated lenders and see reviews of their service from real customers using our bad credit loans eligibility checker.
Mark joined Choose Wisely in 2015. He continues to work in close contact with the providers, brokers and journalists operating in the world of consumer credit.