How much emergency funds to keep momentum?

alexanderstuart

Hey there, long time lurker on this board.

Without posting war & peace my partner and I found ourselves in around £80k of combined unsecured debt by the end of 2023. This was a mixture of existing debt from silly spending habits, house renovation and then failed fertility treatment which really turned it into something that felt a much scarier number.

We took a hold of ourselves two years ago and began the long road to repayment, with the snowball method. We’ve now paid down around £15k if it - so still have around £65k, £35k in interest loans and the remaining £30k is interest free credit cards (that have been balance transferred). 

Our income has also increased recently, we have a monthly take home of £6530, then after essential bills, groceries, and all debt minimum payments we have a £1800 surplus. We switched to an avalanche strategy at the end of last year to focus on some of the big loans after getting rid of some of the smaller amounts on cards etc.

We had been overpaying the highest interest debt £1000 monthly since our salary changes around 12 months ago, but we’ve hit a few hurdles this year.

we were stung with an unexpected vets bill of £2000 which we had to pay, and then car trouble - which meant using our ‘debt overpay money’ and a small bit of credit (around £200).

my question is - I don’t feel we need to explore a DMP or anything like that yet, we are committed to our repayment and HATE ourselves for ever getting into this mess, but we’re encouraging each other by these overpayments and feel proud of our consistency so far. as if we continue with our avalanche strategy I’m hopeful / confident we can get this down to nearly nothing in 2 years or so.

but, we’ve not got an emergency fund / savings to combat events like the vets & car issues , and it’s really demotivated us and our progress in paying it down has slowed this year. We’ve had 7 paydays this year now and only managed to overpay on 2 of them which feels frustrating. We can make all our minimums comfortably but we want to ensure we continue to overpay to free ourselves from this as fast as possible … so based on the above , is it worth us building up a savings pot over the next few months instead of overpaying , and how much? I know it’ll help us taking two steps back - we’re just keen to feel like we’re overpaying again but I know it’s counter productive if we don’t have an emergency fund to fall back on. I’m doing some freelance work along side my job from now until December to which gives us an extra £450 a month. So with £1450 from Augusts pay - what figure feels sensible to put aside in an emergency pot before going back to putting that into our high interest loan?

thanks in advance, this forum can feel a scary place but want to make sure we carry on in the right direction!!

kimwp

Everyone will have their own opinion about emergency funds, but my view (and the maths approach to paying off debt as quickly as possible) is, if you are able to access more credit (or in your case, fund any emergencies quickly from income - are your jobs secure?), is to not have an emergency fund. 

I appreciate that you feel downhearted about having to divert income towards these recent emergencies, but you would similarly be diverting income to your emergency fund, which will attract a lower interest than your interest bearing debts - and that might not be enough in the next emergency, so you might have the same experience of having to use income again.

So the maths says don't have an emergency fund while you have debts and access to credit/income for emergencies.

Risk management says an emergency fund is a good idea in case of job loss/loss of credit availability, with the penalty of taking longer to pay your debt.

Psychology (from your post) says that having an emergency fund will make you feel better because you will feel you have prepared for these eventualities and more in control of your finances.

If it makes you feel more motivated and in control, then go for it - maybe save hard for a couple of months, then have a small amount adding to it each month.

YBR

The generic advice is 3 to 6 months income in easy access savings. 

If you want to think it through in more detail, consider the costs you might have to cover such as replacing a boiler or car or flat roof or ... If your jobs are less secure or harder to find new jobs (and depending on potential redundancy pay) this might need to be more.

As a previous poster says, for some this emergency fund can be the capacity to put it on credit (as you're paying off your debt I guess your credit rating is OK?), but if you're going to hate yourselves for relying on credit again it's totally reasonable IMO to avoid this as a plan, as I can see that it feels like a huge set-back to you. 

Noting that you are encouraging each other by paying down the debt, I'd suggest keeping some of that momentum by putting a proportion of the surplus into savings and the rest on the debt repayments, and/or decide to save all (post-tax) income from side-gigs until you reach your savings target. What that proportion is is up to you both and is potentially arbitrary and flexible e.g. split 50/50 until you have say one month's worth in savings, then reduce to say 25/75 until savings target reached ...

Emmia

Psychologically I think a small emergency fund would be helpful to you - perhaps for one month divert all non-minimum money into a savings account, to give you a good start, and then perhaps top this up by £100/£200 monthly. 

Yes, if you divert, your debts will be paid off slightly slower but I think having a small cushion would help deal with unexpected bumps, and set you up on a better path after the debts are paid off. 

Depending on the size of your cushion /how things are going to the end of the journey you could use some of this savings pot to eliminate a debt when you're at the end of your debt repayment period. Psychologically eliminating a debt (a bit earlier than expected), at that point will also feel good.

Debtfree2026

This is a question I've been wondering as well - with £19k of debt, I have a number of saving pots, for things such as birthdays/Christmas etc and I'm not going to touch these pots as otherwise, I'd be going into credit for those occasions and I really don't want to do that.  But my emergency fund is at £1,100 and I was wondering whether it would be more worthwhile putting it towards my credit card debt.

What I have decided to do, is as Emmia suggests above;- my credit card is 0% for another 14 months or so, min payments are circa £200 a month and I have been paying £500. I have decided to pay just above minimum and put the other £300 into my emergency fund every month....the reason?  Because I can gain interest on it!  Then I can use the money to do a bulk transfer on my credit card at a later date.  

RAS

@alexanderstuart

Does your budget include lines each month for holidays even if only VFR, MOT and car repairs, house maintenance if appropriate, pet insurance/vet bills, medical and dental, presents? Because you know you will have to pay all of those things during the year, so spreading the load over the year is a good idea.

And beyond that, you may need an emergency fund, or access to credit, depending on your situation. If you are self employed, either insure or have access to cover costs, if you have good employment benefits you might get 6 months on half pay.

ManyWays

I agree that you need to put money aside each month for things like Christmas and MOT; these are not emergencies, they happen every year predictably! And you need a "true emergency" fund for the unexpected, even £500 to replace a washing machine is a good idea.

But can I raise a different point; You said "We switched to an avalanche strategy at the end of last year to focus on some of the big loans after getting rid of some of the smaller amounts on cards etc." Avalanche goes after the highest interest rate debt first, this minimises the amount of interest you pay and clears your debts soonest. But it's unusual for loans to be higher interest than cards. Is this because all the cards are at 0%?  

alexanderstuart

ManyWays said:

I agree that you need to put money aside each month for things like Christmas and MOT; these are not emergencies, they happen every year predictably! And you need a "true emergency" fund for the unexpected, even £500 to replace a washing machine is a good idea.

But can I raise a different point; You said "We switched to an avalanche strategy at the end of last year to focus on some of the big loans after getting rid of some of the smaller amounts on cards etc." Avalanche goes after the highest interest rate debt first, this minimises the amount of interest you pay and clears your debts soonest. But it's unusual for loans to be higher interest than cards. Is this because all the cards are at 0%?  

Thank you! And yes so as we cleared that initial £15k off interest credit cards it improved our credit score and allowed us to balance transfer to 0%. So our cards are 0% for 22 months and the loans are both at 15.3%.

Altior

I'd argue replacing 'white goods' is not an emergency, you/we just don't know exactly when they'll need to be replaced. But you know it's almost certain you won't be using the same washing machine in 40 years.

I think you could easily work out the cost of replacing them all, have an indicative life of say 10 years, then have the implied cost applied to a monthly budget. Say £2000 / 120 = £16.77 pcm. This would need to be reviewed annually to keep pace with the market/inflation. If you didn't need to replace any white goods for a year, that 'pot' would yield some interest. Bonus!

An emergency budget therefore applies to a truly unpredictable event. That involves a loss of income. 

kimwp

I think it probably comes down to what you are planning to cover with your pot and what you want to call.it/them. I personally have a "disaster" pot, in case of income loss, which has a year of spending and an emergency fund, to cover unexpected expenses such as white goods or car needing to be unexpectedly and quickly replaced. These aren't really pots as such, more that they total a sum that is the absolute minimum cash that I have and ideally never dip into because every expense is planned.

ET22

I would save a 1000 pound emergency fund first then tackle the debt and the emergency fund. That way you will be prepared so you don't add anything to your credit balance if the washing etc do breakdown. Or its using credit for small emergencies again and so it goes on.

I'd also say add more money to the emergency fund so while you are over paying credit cards etc off I would put small amounts, if you can, in to top it up gradually t0 3,000. Then when the credit is paid off, increase the emergency fund to 6 months worth of income.

Its not either one or the other, its both. Personally I am still in the process of saving a 1000 pounds , the bare minimum for now. Instant access savings account with the highest paying interest rate too.

Recently I got a letter from the benefits departments about PIP I receive which i thought i was going to have to pass another "assessment" after xmas to carry on receiving. Luckily they extended it to February 2029 because they have such a big back log, but for a few months before it was extended I was worrying how I would pay my mortgage given the employment rates are up to nearly 6%. Im not well enough to work and i would have to find a job locally which would be low stress, manageable hours and I think I would struggle to do that too because historically I have been told I am over qualified.

Just my opinion.

Edit, not sure if i have read the previous posts properly