The Value of Building an Emergency Fund (EF)

Willing2Learn

We get loads of people posting their Statement of Affairs (SOAs) that do not budget something toward their EF each month.  It is just so important and really is an essential component of most successful monthly budgets.

The benefits of an EF have probably become most obvious during the current COVID-19 crisis.  Many of us are not currently able to work and have a reduced monthly income.  Some of you will sadly have fallen through the gaps of the government support packages for PAYE and the self-employed.  Those folks that have squirrelled away a respectable EF will still be able to pay their priority bills, other additional contractual obligations, plus normal grocery shopping.  In an ideal world your EF 'buffer' means that the payment of all those monthly expenses can continue for six months (with or without your normal income).  Obviously, this may not be a realistic target for some of you.  But whatever you can afford each month should ideally be saved toward your EF.  After all, any buffer is better than no buffer. 

For those of you that are beginning their debt-busting journey, an EF is still vital.   You can still grow an EF while making your agreed debt repayments.  In fact, creditors will expect their customers to budget something each month toward their EF.  So it is considered perfectly reasonable to be allocating part of your budget towards it.  Building and having an EF while paying off your debts, means that when the unexpected happens (eg car repairs, boiler maintenance etc), you will have the available funds to pay for these repairs without having to resort to any line of credit. 

Edit:  I hope this does not come across as too preachy.  I am basically self-isolating and am incredibly bored.  So I thought I would post something that is (hopefully) useful to some of you.

EimearF

Great post.
I am so glad I have my buffer in place it has prevented the uncertainties from overwhelming me because I know have enough to live off for a bit. 

Stay safe everyone - press pause of the debt busting and focus on ensuring you have food, heat and shelter. Everything else can wait until this storm passes, which it will. 
- I should add, agree any payment breaks with your lender dont just cancel the direct debit. 

sourcrates

Good advice, and always worth repeating.

I too have been self isolating, but now my symptoms have cleared up, i have been summoned back to work.

The joys of been an essential worker.

SuperFrank88

Great post. When you say creditors will expect us to budget something towards a EF, how much do you think is a reasonable monthly amount that they would allow without challenging? £50, £100, more?

I have already started building a EF before starting my DMP on the recommendation from yourself & Sourcrates at the start of the year and I am so glad that I did because when I was sent home from work last week, there was no panic thinking "how am I going to pay next months bills?”. 

So thank you for the help both of you 😊

YORKSHIRELASS

I have so much to learn!  How did you build up your emergency fund before you started your DMP?  At the moment every spare penny of ours is swallowed up by the debt repayments.  One of my worries about a DMP is something cropping up and not having the money to pay for it.  It would be great to know how much you can put in an emergency fund when you are on a DMP too.

Willing2Learn

SuperFrank88 said:

When you say creditors will expect us to budget something towards a EF, how much do you think is a reasonable monthly amount that they would allow without challenging? £50, £100, more?

It depends on whatever your monthly budget says is affordable and realistic.  When I first started on my self-managed DMP, I was only able to make token payments to my creditors.  My EF contribution at that time was only £10/month.   As my income and finances improved, the amount I could allocate toward my EF each month gradually increased.  I was putting £50/month into the EF by the time I was approaching the end of my DMP journey.    (I was self-managing my DMP and gradually became more confident and assertive as time went by...)

YORKSHIRELASS said:

How did you build up your emergency fund before you started your DMP?  At the moment every spare penny of ours is swallowed up by the debt repayments.  One of my worries about a DMP is something cropping up and not having the money to pay for it.  It would be great to know how much you can put in an emergency fund when you are on a DMP too.

We mostly recommend to people that they stop making payments to their creditors for 3-6 months, so that their accounts default nice and early.  You just write to your creditors, advising them you will be starting your DMP payments on MM/YYYY (the date is whenever six months has lapsed). That keeps them in the loop.  An early default is a good thing, as it freezes interest and means the toxic accounts are removed from your credit files much sooner.  After six months of not paying your creditors, you will have built a respectable EF.  Yes, it means you will likely be bombarded with a plethora of scary letters during the six months.  But these should all be of the auto-generated variety and are nothing to worry about. 

Galloglass

We get loads of people posting their Statement of Affairs (SOAs) that do not budget something toward their EF each month.  It is just so important and really is an essential component of most successful monthly budgets.

This is a standard part of the Christians against Poverty approach which appears to be different from the other charities. 

YORKSHIRELASS

Willing2Learn said:

SuperFrank88 said:

When you say creditors will expect us to budget something towards a EF, how much do you think is a reasonable monthly amount that they would allow without challenging? £50, £100, more?

It depends on whatever your monthly budget says is affordable and realistic.  When I first started on my self-managed DMP, I was only able to make token payments to my creditors.  My EF contribution at that time was only £10/month.   As my income and finances improved, the amount I could allocate toward my EF each month gradually increased.  I was putting £50/month into the EF by the time I was approaching the end of my DMP journey.    (I was self-managing my DMP and gradually became more confident and assertive as time went by...)

YORKSHIRELASS said:

How did you build up your emergency fund before you started your DMP?  At the moment every spare penny of ours is swallowed up by the debt repayments.  One of my worries about a DMP is something cropping up and not having the money to pay for it.  It would be great to know how much you can put in an emergency fund when you are on a DMP too.

We mostly recommend to people that they stop making payments to their creditors for 3-6 months, so that their accounts default nice and early.  You just write to your creditors, advising them you will be starting your DMP payments on MM/YYYY (the date is whenever six months has lapsed). That keeps them in the loop.  An early default is a good thing, as it freezes interest and means the toxic accounts are removed from your credit files much sooner.  After six months of not paying your creditors, you will have built a respectable EF.  Yes, it means you will likely be bombarded with a plethora of scary letters during the six months.  But these should all be of the auto-generated variety and are nothing to worry about. 

Thank you so much, that is incredibly helpful.  The thought of not paying anything for a few months is really scary and I am not looking forward to those letters, but I would feel so much better having something set aside.  I want to manage my DMP myself because I want to be in control.

BabyStepper

I love this post, Willing2Learn. This situation we find ourselves in has really exposed the vulnerability of people with no EF. That everything could collapse quite so quickly is shocking. Without my emergency fund I would have been in a right old panic, and mine is currently not even that big (I've been paying off debt). But as you say, something is better than nothing and getting into the habit of putting cash away towards your EF is one of the most helpful things in learning to budget. 

EssexHebridean

Excellent post W2L - thank you for taking the time! 

Singlespeeder

Great timely post ! I have started my journey to build an EF .... I think I NEED about £1k  ... I rent so the really expensive things like roofs and boilers would be covered by the landlord. January is a terrible month for me, just with the car tax, insurance & mot ,  this year especially so as I needed 4 new tyres to get through the MoT . Had I had an EF in place I'd have been fine, fortunately my partner bailed me out (I've since repaid her)  but that highlighted the necessity of the EF. 
So now if there is anything MORE than I've just been paid in my account on pay day, the difference goes into my EF.