2020 has put our ability to survive financial shocks to the test. However, for many, the financial implications of the pandemic have not been as bad as they could have been.
This is thanks to the government’s support schemes.
Other than being unable to work, the biggest causes of financial emergencies are cars, properties, family health and pets. Assuming that you have planned well, your emergency fund should be able to cope with an unexpected cost when it arises.
Our standard advice has been to have at least six months’ worth of expenditure or income in cash, or Premium Bonds, to help you cope with emergencies. It may not be as simple as this and there are a few factors which will affect it.
How many people are financially dependent on you?
Your stage in life will affect the size of the emergency fund you need. Those with children are an example of people who are more likely to experience unexpected costs.
Can you still earn money if there is another lockdown or another pandemic?
Replacing your income for a period is a significant potential cost.
If you are employed, you should consider how well your finances coped during the previous lockdown. Working for the public sector may be more stable than the private sector. If you were able to do your job from home there may be fewer issues.
Being self-employed means you should think about how your business could cope and the financial ramifications of this.
If you are retired this is one unexpected cost you do not need to worry about.
Who much you could borrow in an emergency and how do you feel about doing this?
How much someone can borrow varies from one person to another. However, most of us can borrow money if we need to.
Many would rather cover an unexpected cost using their credit card. Their reasoning may be that cash accounts pay so little interest it is more beneficial for them to do it this way. There is a logic to this when there is zero interest and your you can clear the debt quickly.
However, many of us feel uncomfortable about borrowing. If that is how you feel about it, this approach may not be for you.
What do you feel is right for you?
The research tells us that, on average we experience more than one unexpected cost a year. There is no reason this would change even if there is a recession.
Many clients have a specific level of cash reserves where they start to feel uncomfortable if they go below it. For some this may not be enough they may need to think about having one or two years of income in cash die to what they do for a living and their attitudes to borrowing.
Others may need as a figure more like three months and have more than they need. What they do with their excess will be down to how they feel about their financial position.
What is your plan?
Another element to this is having a plan in place for financial emergencies. You can then implement what you decided upon in better times and get on with your life. This may be to switch to paying interest only on your mortgage for some time or stopping saving temporarily. The plan will be specific for you, but you should have one.