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Reasons for an Emergency Money Fund

Finances can be tight for almost everyone – many of us live from paycheque to paycheque in today’s difficult economic climate. This is why a lot of people struggle when faced with a financial crisis.

It’s important to have an emergency money fund to help cope with the problems life can throw at us. Unfortunately, the majority of UK adults don’t have any spare money tucked away for a rainy day.

saving money

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How many people have savings?

Research carried out in 2020 to determine the impact of the Covid-19 lockdown revealed only 25% of women and 17% of men had an adequate emergency money fund. On average, the savers had enough money to last between 4.5 and ten months.

However, around one-fifth of UK adults admitted to having no emergency savings at all, while the remainder didn’t have enough money saved to last any length of time. The research, published on the consumer site, Your Money, said more than two-thirds of adults had to cut back on spending during the lockdown.

Aside from the financial crisis caused for almost everyone by the pandemic, there are many reasons for an emergency money fund in normal times.

Redundancy and car problems

Among the most common reasons are redundancy, or a reduction in working hours; a big repair bill as a result of car problems; needing a new car; boiler breakdown or an unexpectedly high utility bill.

According to the Office for National Statistics, the number of UK employees made redundant in 2020 soared to a record annual high of 262,279. The government’s furlough scheme is believed to have saved some jobs, but as the pandemic continues, the economic fallout has plunged the UK into a deep recession.

Research by Warrantywise shows the average car repair bill is £603. If your car is more than three years old, there is an 84% chance it will break down during the next three years, so a big repair bill could be looming.

The cost of boiler repairs can vary greatly, depending on what is needed. A minor repair, such as a replacement gas valve or fan, can cost around £150, but more serious jobs can include replacing a heat exchanger, which can cost around £400.

Unexpected medical bills

Health reasons can also cause unexpected expense, such as a dentist’s bill for emergency treatment, an unplanned pregnancy, or, sadly, funeral expenses.

If you have an NHS dentist, your bill could be £282 if your treatment is considered to be a more complex procedure. If you don’t have an NHS dentist, you could face an initial consultation fee of £150, with the costs of the actual treatment added onto this.

If you have a baby whom you haven’t planned for, this can be incredibly expensive. Research by insurer LV suggests the average cost for the first 12 months of a baby’s life is £6,000, averaging out to £500 a month. This covers essential costs such as a car seat, baby clothes, nappies, food, pram, cot and baby bath. Items classed as non-essential, such as toys and a baby bouncer, can put the extra expense on top of this.

A report by SunLife says the cost of organising a funeral is steadily increasing. It currently stands at £4,184 in the UK – an increase of 128% since 2004.

Tax bills and rent arrears

Other reasons for an emergency money fund can include a large tax bill from HMRC; an increase in rent; trying to pay off rent arrears to avoid eviction, or replacing a broken phone if it isn’t insured.

When it comes to HMRC, a correspondence saying you owe money is unwelcome at any time – but in light of the pandemic, it could spell disaster for many. According to the tax office, a lot of the problems occur for people filling in self-assessment tax returns.

HM Revenue and Customs might not have all the information required to get your tax right, especially if it includes different sources of income such as wages, private pensions, an employer pension, state pension, or other incomes. It can sometimes seem like a jigsaw puzzle, so when HMRC puts all the pieces together, you might end up owing money.

Figures released by HMRC showed a staggering 4.7 million people had paid the wrong amount of tax in one year alone. Errors in the PAYE system can also occur, as well as self-assessment. Around 1.2 million people ended up paying too little tax through PAYE alone, owing the tax office an average of between £500 and £600 per person.

Research reveals more than 840,000 tenants in England and Wales are currently in rent arrears with their landlords. For one-fifth of these tenants, the debt is more than £1,000. The arrears have built up since the Covid-19 lockdowns first began in March 2020.

Research carried out by Dynata, on behalf of the National Residential Landlords’ Association, says the average arrears are between £251 and £500. The people in arrears have been described as being “pushed to the brink” by shorter working hours and redundancies.

While evictions were banned during the height of the pandemic, the law has now changed to allow landlords to begin eviction proceedings against errant tenants. Homeless charities fear a spate of evictions may occur as a result.

Costs of quarantining

The latest fear for British holidaymakers is being stranded abroad while on holiday, due to ever-changing Covid restrictions, or having to pay to self-isolate in a hotel on their return.

With the lockdown restrictions gradually easing, people have been flocking to take a foreign holiday in green-listed countries considered to be relatively safe. However, the risk is that the regulations will change while people are away, especially since the Indian variant of Covid is beginning to spread across the UK.

For people coming back to the UK who are told they must quarantine in a designated hotel by law, the cost is £1,750 per person for a ten-day stay. Anyone who breaks the quarantine rules can face a fine of up to £10,000.

Either way, it doesn’t bode well if Prime Minister Boris Johnson makes an urgent change to which countries are green, amber or red-listed while British holidaymakers are out there. It could leave people stranded overseas if they can’t afford the quarantine fee.

If you’re one of the thousands of people who don’t have an emergency fund and you’re faced with financial difficulties, there are always short-term loans to help you survive these challenging times.

Borrowing cash secured against your vehicle can help you get out of a tight spot financially in the short-term until your finances are in healthier shape.