Budgeting - Emergency Fund & Emergency Fund - Advise Request

matt.j_3

Hi Forum,

Looking for some suggestions or feedback on how to develop our finances and budgeting going forward. 

I am currently looking at all our finances and putting together a profile of all our bills including annual bills etc so my wife and I can sit down and start reorganising our finances and the way we think about money so that we are more controlled and have a plan going forwards.

I have been very fortunate in the past to have earnt enough to not really worry about our budget at all (our expenses are not huge), but the past 12 months has taught me to stop being so relaxed as I have been in and out of furlough which we have managed well and not put ourselves into debt because of our lifestyle or silly decisions.

But, it has given me a kick up the bum to take better management our of funds and account for the pennies and pounds coming in and going out, so I am looking out our budget, savings, debts, my pension and our kids savings accounts and the way we behave with month. 

I have been trying to find some good and easy resources online regarding personal finance and wealth and it is mine field of information, including way to much in investing and seemingly get rich quick YouTube advise etc. I am ignoring these and trying to find some more basic advise to become stable and controlled in our budget before I consider learning more about growth etc.

Our situation is that we are not swimming in debt we have a little on credit cards due to some online expenditure this month (lockdown meant more online purchases), it is £576.22 and then the remainder of a bigger joint personal loan that was taken years ago for car purchases just before the corvid crisis, this sits at around £3000 remaining and the payments are around £420. We have a mortgage which is remaining at around £78,000 but will have to consider moving in the near future to a slightly bigger house (not huge leap up), but in a better senior school catchment area, so our mortgage will increase.

I currently take into account our monthly bills but have ignored the annual bills and just end up using the savings account to pay for car insurance etc when it rolls around and then put back into the savings each month etc, so I am collecting the info on at what and when we spend it for annual bills. 

Our current savings are around £14,000 at the moment, and based on common advise I have seen I think I need to put £1000 of this into a separate account to use as an emergency fund/unplanned expenditure to ensure we don't build up debt on a credit card that rolls over into the next pay period and we start in the red before we even get paid. We then pay ourselves back into this fund when we get paid to top it back up to £1000 if it is used before we pay any other savings accounts etc.

The next common advise I see is to pay off all non mortgage debt. We have been talking about clearly the credit card away and learn then we need to learn some new behaviour with it. We are just deciding if we should pay of the £3000 now as it will give us £420 back each month and then reduce our monthly bills by £420 which leads to the next common idea the second emergency fund.

I read that it is recommended to have 6 months savings that cover all household bills in case of redundancy or that one of us can't work for a period, and this is were my initial question comes in. Where would you put this money/build this money up into? Ideally you don't want to use it, so it will sit in an account which would be useful if it would grow a bit. Therefore I guess I need to consider an account with interest, but do you put it into an account with the best interest even if it locks it in for a while as you hope to not need it, and you definitely do not want to use it for common expenses?

After this I am not sure what to consider, but I think it would be best to get the above done first before thinking about what to do with our income next. 

blue.peter

I'm not clear exactly how far you've got, so I'm not sure how helpful my first point will be. However, MSE offers a free budgeting spreadsheet. It can be downloaded from this page. This will help you with the infrequent expenses as well as the monthly ones.

Where you put your various funds is entirely up to you. You might drop them all into a single savings account and only have notional "pots", perhaps recorded on a spreadsheet, or you might prefer multiple savings (or whatever) accounts.

However, your emergency fund needs to be readily accessible. If you put it into a fixed-term account, it might get a better rate of interest, but typically with a downside - either it can't be withdrawn until the end of the term (making it useless for emergencies) or it can be withdrawn on notice (not much better) or with a penalty for early withdrawal. Look at the terms availabble and make your choice. Personally, I keep my emergency money in an easy-access account, and accept a paltry rate of interest on it. Going to the other extreme, you could invest it in OEICs or something of that sort (even, maybe, direct investment in shares). That might get you a decent return, but at the risk of losing money instead. You need to weigh up the risks and benefits of any approach.

There is no single right answer to budgeting and financial control. You need to do things in a way that suits you.

enthusiasticsaver

If you have a loan that presumably you are paying interest on then I would clear that as the interest on savings will be no where near as much as you are paying on borrowing. Same goes for any credit card debt. 

You are correct in that you should have an emergency fund and ideally 3-6 months of your normal outgoings. This needs to be accessible and unfortunately at the moment it is difficult to find any easy access accounts paying decent interest.  Ours is with the Yorkshire building society internet saver but pays less than 1% interest.  Some people use premium bonds but that takes longer to access. You will find it difficult to get decent rates unless you are willing to risk losing capital by investing and this is not something you should do if you are likely to need it within the next five years so given you want to move I would park that for now. 

Some people do use savings pots to save for annual expenses like insurances, christmas etc but we do as you do and just have one savings pot which we pay into each month.  As interest rates are low pretty much everywhere I see no point in having lots of accounts but it is a personal choice.  You will probably get the best rates using regular savers but then you will be restricted on withdrawals. 

md258

Consider what you would be using this fund for- is the main risk losing your job or something else?

If so, what will you pay for and how you will pay in an emergency- if you have a high credit limit then you might want to pay as much as possible by credit card. This could then be combined with an account that needs some form of notice (and better interest).

Obviously some things can't be paid on credit card (mortgage/other direct debits) so these will still need readily available cash. I keep £5k in a Halifax account for this purpose (£5 per month).

blue.peter

matt.j_3 said:

 I think I need to put £1000 of this into a separate account to use as an emergency fund/unplanned expenditure

Is this enough? Have you thought about exactly what emergencies might arise? For example, my boiler was condemned several years ago. Replacement then cost me about £3,500, and I had to find that in a hurry.

What do you use to keep track of your finances? You might find it helpful to use a money mamagement tool. Suggestions:

1.  Ace Money (Windows/ Mac - the Windows version works with Linux + Wine);
2. Microsoft Money (Windows only - no longer developed, and now available free - the most recent UK version can be downloaded from my Dropbox);
3. Money Manager EX (free, available for Windows/Mac/Linux).
   

enthusiasticsaver said:

If you have a loan that presumably you are paying interest on then I would clear that as the interest on savings will be no where near as much as you are paying on borrowing. Same goes for any credit card debt.

Agreed. The general rule with regard to debts is to pay of the ones with the highest interest rate first. This will typically give an order of attack something like this:

1. overdraft;
2. credit cards;
3. unsecured loans;
4. mortgage.
   

matt.j_3

blue.peter said:

matt.j_3 said:

 I think I need to put £1000 of this into a separate account to use as an emergency fund/unplanned expenditure

Is this enough? Have you thought about exactly what emergencies might arise? For example, my boiler was condemned several years ago. Replacement then cost me about £3,500, and I had to find that in a hurry.

What do you use to keep track of your finances? You might find it helpful to use a money mamagement tool. Suggestions:

1.  Ace Money (Windows/ Mac - the Windows version works with Linux + Wine);
2. Microsoft Money (Windows only - no longer developed, and now available free - the most recent UK version can be downloaded from my Dropbox);
3. Money Manager EX (free, available for Windows/Mac/Linux).
   

enthusiasticsaver said:

If you have a loan that presumably you are paying interest on then I would clear that as the interest on savings will be no where near as much as you are paying on borrowing. Same goes for any credit card debt.

Agreed. The general rule with regard to debts is to pay of the ones with the highest interest rate first. This will typically give an order of attack something like this:

1. overdraft;
2. credit cards;
3. unsecured loans;
4. mortgage.
   

£1000 is just a number that was gleaned from resources online, I guess it is just a number but is based on a minimum that should be in an emergency fund. I see what you mean regarding how much an emergency fund should be, especially as my wife is currently ordering some new school clothes for my eldest has he has had a growth spurt in the last few weeks.

In terms of how I track our finances, it is very rudimentary, a spreadsheet which details our bills for the month, the income and outgoings netted off. 

We currently have all income going to one account which all the standard monthly bills are debited from. I have a quick calculation based on what % I would like to save in the month, and what % I would like to put into my personal pension. We budget money for what we call 'everyday' type spend, food, fuel etc and this is put into a separate account that we draw from for weekly shopping etc, this leaves the money in a bills account so they are covered to the £.

With the bills account calculated and fund for food etc separated I know what I can save/invest into my pension, which I am aware I would rather invest first then spend after. What is then left is to manage the money put into the everyday account.

I am aware that we need to keep onto of bills to see where we can reduce them, especially in the everyday budget money, but as a family of 4 this can be quite hard sometimes. What I do not like about this everyday budget is that we always hope there is money left and we don't have to take some back out of savings to cover it. This can be a bit hit and miss so I want to get better at forecasting this money.

In the main we have been ok with our budgeting and spending keeping it in the black each month, but I think we can do better and want to ensure regular investment/savings for our future whilst ensuring we don't have to keep borrowing money (credit cards or other) so we end a month with some debt and have to apportion some of the following months income to clear it.

kuratowski

Based on the last post, I am going to put in a plug for YouNeedABudget (YNAB).  Which is a subscription software you do have to pay for,  so there is that downside.  Probably not everyone buys in to it.  However, if you embrace the system, you will end up with much better control of your money, and hopefully avoid going into debt unintentionally.

blue.peter

matt.j_3 said:

In terms of how I track our finances, it is very rudimentary, a spreadsheet which details our bills for the month, the income and outgoings netted off.

This is where a money management program can help you. I use Ace Money. (I recommend it, but can see that the price might put you off, and so I suggest looking at one of the free ones.) I can set up scheduled payments, so that they are applied automatically to the relevant account. It has "look ahead" functionality, so that I can see what's coming up and plan for it. I'd expect the other programs that I mentioned have similar functionality. I've only had a quick look at MMEX, but liked what I saw. I suspect that that's what I might go for if I was starting today. (I've had Ace Money for about 15 years.) Do have a look at one or another and see if it would help you.

matt.j_3 said:

I am aware that we need to keep onto of bills to see where we can reduce them, especially in the everyday budget money, but as a family of 4 this can be quite hard sometimes. What I do not like about this everyday budget is that we always hope there is money left and we don't have to take some back out of savings to cover it. This can be a bit hit and miss so I want to get better at forecasting this money.

The MSE spreadsheet that I mentioned earlier is a bit more sophisticated for planning ahead, and well worth a look. It might help you. I'm not familiar with YNAB, but that might well be better still.

matt.j_3

kuratowski said:

Based on the last post, I am going to put in a plug for YouNeedABudget (YNAB).  Which is a subscription software you do have to pay for,  so there is that downside.  Probably not everyone buys in to it.  However, if you embrace the system, you will end up with much better control of your money, and hopefully avoid going into debt unintentionally.

Thank you, I will take a look at it and see what it does as I have never heard of it before.

I will also take a look at the Ace Money which has also been suggested to see what that is etc.

matt.j_3

blue.peter said:

matt.j_3 said:

In terms of how I track our finances, it is very rudimentary, a spreadsheet which details our bills for the month, the income and outgoings netted off.

This is where a money management program can help you. I use Ace Money. (I recommend it, but can see that the price might put you off, and so I suggest looking at one of the free ones.) I can set up scheduled payments, so that they are applied automatically to the relevant account. It has "look ahead" functionality, so that I can see what's coming up and plan for it. I'd expect the other programs that I mentioned have similar functionality. I've only had a quick look at MMEX, but liked what I saw. I suspect that that's what I might go for if I was starting today. (I've had Ace Money for about 15 years.) Do have a look at one or another and see if it would help you.

matt.j_3 said:

I am aware that we need to keep onto of bills to see where we can reduce them, especially in the everyday budget money, but as a family of 4 this can be quite hard sometimes. What I do not like about this everyday budget is that we always hope there is money left and we don't have to take some back out of savings to cover it. This can be a bit hit and miss so I want to get better at forecasting this money.

The MSE spreadsheet that I mentioned earlier is a bit more sophisticated for planning ahead, and well worth a look. It might help you. I'm not familiar with YNAB, but that might well be better still.

Thank you. I will take a look at Ace Money to see what it is and how it works. The purchase price doesn't put me off if it works for what I need and it seems only a one time purchase, which YNAB is a subscription which I would like to avoid if possible. But, I will check its functions out too.

matt.j_3

After the comments to my post and looking at the basic budgeting sheet on the MSE website, it seems that where we seriously lack an understanding is in the day to day expenditure and not equating money to bills that we know will come up some day, but don't know when.

So, whilst my spread sheet gives a high level overview of the obvious DD bills, it doesn't give us a clue on what the food, fuel, other daily expenses is so we 'think' we spend £X a month of fuel, or coffee shop, or main food shop etc.