Should we all have an Emergency Fund?

 Business Debt Service Advice Matters August 2018

In the last few months the Business Debt Service has helped several clients whose lives have changed for the worse suddenly by a major life changing event that was unforeseen. A major heart attack, terminal cancer and life changing injuries from falling down the stairs have just been some of the reasons why clients have had to turn to credit to manage their essential outgoings. For a sole trader who runs a business independently, a change like this can see their income potentially disappear overnight.

This highlights the need to have an emergency fund; to set money aside for such an event. Therefore, it makes us consider, just how easy would this be and how much should we save?

With sole traders and small businesses struggling due to lower consumer spending, higher rates and other overheads, higher wage costs and the looming Brexit uncertainty, saving may seem like an extravagance that many just cannot afford.

For those businesses that are carrying ongoing debts, the most sensible thing to do is to continue to pay off your debts with any additional income whilst saving a lesser amount. Yet, when the debts are settled it could be beneficial to retain a credit card to have access to credit in an emergency and a credit card offers additional protection when purchasing items online or over the phone. However, in all cases even those people who have ongoing debt there is still justification for saving a small amount for future events, for example replacing some tools of trade which deteriorate over time.

For those traders that are relatively debt free, or would appreciate having the emotional connection of having funds to fall back on in case of emergency, then the key is setting aside a small amount to begin with and getting into the habit of saving something every month. The latest Lloyds Bank savings report highlighted that regular savers are happier and have less stress compared to non-savers. Even those not currently saving tend to agree in the report, as 68% of those currently not saving said they would feel less worried if they did save regularly. Therefore, saving is clearly mentally beneficial as well as financial.

For those who already feel like they are struggling to make ends meet or to have a consistent cash flow, saving a small amount may seem impossible. It is occasionally harder to obtain payment within your specific timescales from work carried out and this does not help business to save as their income is inconsistent and variable. However, if you get an unexpected boost in income from an additional contract or work source, it is commonly accepted that his extra cash is more likely to be drawn down personally to be used immediately and none of it retained. Whilst we all need a treat now and then why not save this occasional extra income as you didn’t expect to have it anyway?

For those who bank on an app or through the internet, an idea is to transfer small amounts frequently into another savings account. You won’t even notice it has gone and it will eventually add up. This buffer can accumulate quite quickly and you shouldn’t miss the small amounts transferred in your cash flow.

That leads then to the question, just how much emergency fund savings are enough. Well the truth is any amount of savings is better than none, and more is always better. However, it would be beneficial to try to at first build up a minimum of three months’ worth of your essential expenditure (mortgage, rent, food, utilities, insurances etc). Then build that up further to three months’ worth of your full monthly drawings from your business, and then potentially up to six months of your full monthly drawings from your business. That level of savings would mean that any major event or emergency should be easily navigated, and any more than that would see you missing the chance to earn more interest in an account where you don’t have quick access to your funds.

For those sole traders and businesses who may be struggling with their ongoing financial issues and debts, Advice NI’s Business Debt Service is available on 0800 0838 018 or and is open 9am to 5pm, Monday to Friday. You can also visit our website to access factsheets and further advice at: