Picture the scene: the boiler has broken down in the depth of winter and you’ve got no choice other than to replace it. You know that the cost is going to run to a couple of thousand pounds once you’ve factored in labour… so what do you do? Nobody would be thrilled by this situation – but if you haven’t got savings set aside, it could spell disaster. In retirement, when income typically goes down, this can become even more of an issue.
The solution is to be prepared, and this month we’re challenging our readers to consider how they’d cope with a sudden cost.
Review your existing situation
If you’ve already set up an emergency savings pot, then you might feel comfortable. If not, do you have a contingency plan? Here are some suggestions, and things to think about...
Setting up an emergency fund
After considering your current situation, if you don’t think you’re prepared then there’s no need to panic. Instead, one of the best things you can do is to start setting up an emergency fund as soon as possible. An emergency fund is a dedicated set of savings that you set aside for the most important expenses that come your way.
Set a savings goal. Ideally, an emergency fund should cover around 3 months’ worth of spending – leaving you with a helpful cushion in case of a cash flow problem or enough to cover a reasonably large emergency. Don’t make the mistake of setting a lower goal because you feel like you don’t have a secure income with spare money to set aside – realistically, this probably means you need the savings even more.
Budget an affordable amount of monthly emergency savings, even if this means cutting back on some of your current spending. For instance, you may choose to forgo one dinner out each month, saving the money instead. If your monthly savings amount feels small, don’t let that deter you: with an emergency fund, every little helps.
Choose an appropriate savings account. There are two important factors to keep in mind: how easy it will be to access your cash, and the interest rate that will be applied. Over time, even as little as half a percent can make a big difference to how quickly your interest grows. Try to find an account that gives you instant access to cash at a reasonable rate.
Stick to your plan. Set up a standing order, and make sure that you’re paying in monthly. Start small if you have to: you may find that as the fund starts to grow, your appetite (and ability) to save more does to.
Releasing cash for a longer term expense
See if equity release could meet your needs
Use our equity release calculator to find out how much you may be able to release.
So far we’ve looked at how you can afford the unexpected – of course, in some cases you’ll be in the slightly more fortunate position of planning for a large expense. This gives you more options to play with as you have a little time to wait, and you could consider a range of possibilities including asking for help from friends and family or downsizing. Another possibility that may become available to you is equity release.
Equity release allows you to release some of the money that has built up as equity in your home. You can take a one off lump sum, or choose a drawdown plan
which will allow you to take additional amounts in the future should you need to. A drawdown plan could also be a way of preparing for any unexpected expenses that could come your way in the future. It could also be a way of repaying any existing debt that you may have taken on during an emergency situation.
If you’re interested in equity release, please read ‘is it right for you?
’ carefully first. Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits. The most popular form of equity release, a lifetime mortgage, is a loan secured against your home. You should always think carefully before securing a loan against your home.