Most financial experts agree that we should all be trying to create an emergency fund if we don’t already have one. Not everything in life is predictable, and with the economy in its current state it’s a good idea to have an emergency fund to partially offset worries about things like redundancy.
An emergency fund can also be useful if you’re a new homeowner and your roof falls in, or you need to make a completely unexpected purchase such as an expensive overseas trip, or a new car. It can save you having to take out an expensive loan, and may cover expenses that various types of insurance wouldn’t cover you for.
What if the emergency isn’t a major one?
I’ve recently started a secondary fund to cover smaller emergencies that are at the mid-to-lower end of the scale. I’m calling this my ‘slush fund’ and keep it separate from the main emergency fund.
Like a main emergency fund, I keep my slush fund in an easy access account, and will move it if the interest rate on it becomes uncompetitive.
At the moment I’m paying in small dribs and drabs of spare cash, wherever I can find it, just to create a small pot. Later, I might set up a standing order to pay into it every month, which would probably be the easiest option for most people.
My slush fund has had a number of benefits so far…
Keeping the emergency fund safe
If you’re a big spender, there is always going to be a temptation to dip into the real emergency fund for purchases that are not 100% essential. The slush fund has given me a secondary line of defence against this sort of temptation.
A way to ‘self-insure’
I regularly put money aside to ‘self insure’ for my pets for anything above and beyond regular trips to the vet, rather than taking out pet insurance. This was a personal decision made on the age and health of the pets, so it may not be suitable for everyone, but this year it’s worked out as a sum of money that could be kept in a savings account, rather than money paid out to insurers that I won’t be getting back.
The same thing applies to medium-sized household maintenance problems. It’s fairly simple to put a few pounds aside every now and then in case there are problems with a boiler, the guttering, a drain, and so on. You don’t necessarily have to take out a regular agreement with the energy companies etc.
Making overblown utilities bills less scary
Having a small-ish cash cushion really takes the sting out of paying for anything more complicated than the usual regular checks and maintenance. In addition, it can take the ‘fear factor’ out of receiving an unexpectedly huge utilities bill. Given the cold, wet British summer we’ve experienced so far this year, a slush fund might not be such a bad idea.
Would you consider creating a secondary, smaller emergency fund? Or do you already have one?