Have you experienced any of these rainy day events in the last year?
- Your car broke down
- The washing machine packed up
- Your laptop or phone got badly damaged
- The central heating boiler stopped working
Sooner or later, it will rain, so we can confidently expect to receive an unexpected bill at some point, though we may not know when or how much it will be. Here’s a list of the most common unexpected bills, and how much they typically cost, published by the Government’s Money Advice Service last year.
That’s why it makes sense to have some money tucked away in a rainy day fund. Saving is a big topic, and there are lots of good reasons to save regularly, but the first and most important reason is so that we can cope with unexpected costs. As a rule of thumb, we’re told that every household should have emergency savings equal to at least three months’ disposable income – that would amount to several thousand pounds. If every household had at least £1,000 saved up in a rainy day fund, they would be able to cope with most unexpected costs.
But the Money Advice Service report (see link below) showed that 4 out of every 10 working people have less than £100 they could draw on in an emergency. Not surprisingly, they found that people with higher incomes generally save more, but almost a quarter of adults with a household income of less than £13,500 still managed to have savings of more than £1,000. So whether and how much we save is not just a matter of how much we earn.
If you are fortunate enough to have a rainy day fund of £1,000 or more you can stop reading here. I’ll get back to you in my next blog when I’ll be talking about how to set up a savings account. If not, please read on.
You may be reading this and thinking “I can’t afford to save” or “I don’t need savings – I’ll just use my credit card”. For those without sufficient savings, the credit card is the most common way of paying an unexpected bill. But the credit card solution only creates or worsens the problem of debt – you still have to pay the bill, plus interest. And the average credit card interest rate is 23%, but rates of 30% or more are not unusual. So credit cards are no substitute for savings. I know some very disciplined people who use credit cards and pay off the entire balance every month without fail. But for fallible humans like me (and perhaps you?) they are just too risky. It’s like keeping a loaded shotgun in the house as a protection against burglars – you’re much more likely to end up accidentally shooting yourself in the foot – or worse.
Make friends with your future self
If you’re still with me you’re probably finding this discussion quite painful. I’m sorry about that. Imagine instead a future scenario, where you have no overdraft or credit card debt, so the monthly credit card repayments you currently make can instead go into a savings account. You find you’re now able to save £100 or more every month. Within a year you have managed to build up a Rainy Day savings fund of £500 – big enough to deal with most emergencies – and you are no longer constantly worrying about how you’ll be able to afford the next unexpected bill. You are now confident that before too long you will have over £1,000 saved up and you have started thinking about saving for bigger things.
Our problem as humans is that we discount the future – so £100 that I can spend today is worth a lot more to me than £100 that I can’t spend until this time next year. And when we’re battling to cope with the problems of today, we don’t have much energy, time or mental headroom left to think about tomorrow. But the more you can visualize that alternative future scenario, the more real it will becomes to you, and the more likely you are to make decisions that favour your future self, at the expense of your present self.
Link: Low savings levels put millions at financial risk, Money Advice Service Press release