If you are in a debt management plan (DMP), an IVA, a Debt Relief Order (DRO) or have gone bankrupt, then you probably have little ‘spare money’ each month. It may seem very difficult to save anything – but you need an emergency fund even more because you will find it difficult or impossible to borrow in a crisis.
A small emergency fund is your financial first aid kit
If you can only save £10 or £20 a month, it may feel pointless, especially as you certainly have things you would really like to buy with that money immediately. What is the use of an emergency fund with only a £100 in it, you may think, that won’t help if I need a new boiler or the car needs a new engine….
That’s true, but a small emergency fund can get you through a lot of lesser problems – when all the kids need new shoes in the same month or the washing machine has to be repaired.
So think of your rainy day savings like an umbrella – it will keep you dry if it rains, but won’t help if your house is flooded.
Or like a first aid kit – it doesn’t stop you having to go to your GP or even hospital if you are seriously ill, but having some pain killers and sticking plasters around makes everyday life easier, even if it won’t cure a broken leg.
What if your emergency fund isn’t big enough?
Worrying about this is not a reason to not begin saving money!
If you hit a large problem, or even a moderate one when you have only recently started putting money aside, what you can do depends on what type of debt solution you are in:
- in a debt management plan run by a someone else, contact your DMP firm and ask to cut or halt your DMP payments for a while. If you are with a commercial DMP company which charges you a monthly fee, this could be a good point to end your DMP with them and either run your own DMP or go to one of the fee-free firms listed here;
- if you are administering your own DMP, then write to your creditors explaining your problem and reduce or cancel this month’s payments. You don’t want to do this every few months, it would be better to change your DMP payments so that you can put aside more into your emergency fund;
- in an IVA, what can be done will depend on how much money you need and what your monthly payments are, see my article on What Happens If You Can’t Afford IVA Payments. Some of the options can only be done once in your IVA – having a small emergency fund is really important here so you don’t use your one chance too early on something minor, then have a bigger problem later.
- if you are paying an IPA after bankruptcy, contact the Official Receiver and ask if your payments can be reduced.
You may be wondering about borrowing more money to cover the problem. In an IVA or a DMP, this is likely to be against the terms of your agreement. With a DRO or bankruptcy, although you can theoretically borrow money (if you are trying to borrow more than £500 you have to inform the lender about your bankruptcy or DRO), you are likely to find it impossible to get an unsecured loan.
Even if you could find a lender, it would probably be at an expensive rate and you would then find it very difficult or impossible to manage the repayments, so don’t fall into the trap of pawning things, logbook loans or Amigo-style guarantor loans.
So start saving!
A great way to do this is to get an automatic savings app. I reviewed two new apps, Chip and Plum, that started in 2017 and found that both work really well. They are simple and painless to use, see Two apps to automate your savings. There is a code for a £10 bonus when you start to use one of them!
Think about opening a new account for your emergency fund – it’s a good idea to have an emergency fund in a separate account so you aren’t tempted to dip into it too often. Don’t put the money in any bank that you owe money to of course – you could join a credit union based on where you live or work or the type of work you do, see Find Your Credit Union.