Act now, before there's an act of God
If the worst happens, many people have no savings or insurance to cope. Make an emergency financial plan, says Chiara Cavaglieri
Saturday 08 February 2014
Incidents such as the flooding of the Somerset levels will give many people around the UK food for thought. In a few short weeks people's whole way of life has been turned on its head and, although blows as major as flooding are thankfully few and far between, it highlights the fragility of our personal finances. How secure are your plans? Do you have a plan B in case of major incidents or even minor ones such as a boiler or car breakdown?
Over two thirds of people spent an average of £1,101 in the past year on unexpected costs, according to a recent Money Advice Service survey, but worryingly, a third of households say they have no savings in place whatsoever. Car repairs were the most common emergency and drivers spent an average of £1,341 to fix their motors. Winter is prime time for boiler breakdowns, costing a hefty £973 to replace or repair, but even fixing a washing machine could set you back £245. Average vet bills add another £248 to the list, while a trip to the opticians could leave you £195 out of pocket.
The standard advice is to put aside three months' salary as your rainy-day fund but for people with no savings, Money Advice Service recommends small sacrifices (giving up the daily coffee, cutting back on treats) to save £3 a day, working out to £1,095 over the year. There's no point leaving this in a drawer – your money should be working as hard as possible by earning interest. An easy-access cash ISA (individual savings account) is usually the best place to start for the tax-free benefits, but right now, current accounts are looking good, for example, the Nationwide FlexDirect account pays 5 per cent on up to £2,500 and Clydesdale/Yorkshire banks pay 4 per cent on up to £3,000.
If you need money in a hurry, borrowing may be your only option, but do it the right way. Resorting to a payday loan could cost way over the odds. Andrew Hagger of moneycomms.co.uk says that borrowing just £400 over one month could cost over £130 with a payday loan, compared with just £2.65 with a cheap credit card such as the Sainsbury's Bank Nectar Low Rate card, which charges just 7.8 per cent APR. By applying for a decent credit card or organising an authorised bank overdraft limit now, you've got a cheaper financial cushion available if needed.
"Just a little preparation now can save you a packet in the future, if you suddenly need to find a few hundred pounds in a hurry," says Mr Hagger. "Unfortunately many consumers don't have a Plan B, hence why so may turn to the speedy but very costly option of payday loans, or risk going into unauthorised overdraft."
Insurance is another option but tread carefully. For starters, standard policies will not cover wear and tear. This means you won't be able to claim on your car insurance for bills resulting from a failed MOT and although home insurance policies may cover white goods and electrical items from theft or damage, they are less likely to cover for breakdown.
Even if you are covered by insurance, it may not be prudent to make a claim. For example, you may have to pay a large excess up front and you could also lose any no-claims discount you've built up, meaning you will pay higher premiums.
Standalone home emergency insurance can be a comprehensive way to protect yourself against the cost of a burst pipe, boiler breakdown and drainage trouble, but always check your home insurance policy first. Ben Wilson at Gocompare.com, says two thirds of home contents policies provide cover for home emergencies either as a standard feature or as an additional extra, typically for around £30 to £50.
But Mr Wilson says: "Like any other type of insurance, the level and cost of cover varies from policy to policy, so to make sure that you are getting what you need you should read your policy document carefully to check for cover limits and exclusions."
You will save yourself a lot of trouble by ensuring any equipment is properly installed or maintained. Your insurer may refuse to pay out if your boilers or heating systems are not properly inspected or serviced once a year. You should also keep your receipts for equipment such as washing machines and TVs safe as you may be able to get a replacement or repair under the retailer guarantee.
Knowing your consumer rights is also important. Legally, goods should be "fit for purpose" so get in touch with the retailer if something breaks down sooner than it should. If, say, a washing machine breaks down after a year when you might reasonably expect it to last for more, the retailer should replace or repair it.
For some costs, insurance is really the only answer. With no NHS for animals, vet bills can easily run into the thousands, yet more than half of the cat and dog owners in the UK have no insurance. Policies can be complicated but the most important feature is how insurers approach claims. For example, some will set a fee limit for every insured incident within a 12-month period, while others have no time restraints. The most comprehensive option is a lifetime policy that renews the vet fee limit every year, or offers a high overall limit for the lifetime of the animal, which means you get ongoing protection for chronic conditions.
Don't forget to cover yourself too. If you have dependants such as a partner or children, life insurance will pay a tax-free cash lump sum if you die within the term of the policy and premiums for a 35-year-old start from as little as £7.79 per month with Legal & General for £100,000 level term assurance over 25 years, according to independent protection adviser LifeSearch (The price could double if you are a smoker).
Being out of work because of illness or injury is potentially the most devastating financial emergency. Critical illness cover can be added to life insurance and pays a tax-free cash lump sum if you suffer a specified illness such as cancer, heart attack or stroke.
However, income protection is usually a better safety net because it pays out a long-term tax-free income if you fall sick and can't carry on working. LifeSearch says £1,000 per month cover for a 35-year-old non-smoker would start at £13.02 per month with Holloway Friendly (deferred for six months). The best policies offer "own occupation" cover, which pays out if you are unable to do your current job (rather than any job) but always check the level of cover and ask your insurer about any exclusions, particularly for the most common conditions such as back, neck and stress problems.
Tom Baigrie of LifeSearch says: "Income protection is arguably the most important type of protection insurance because it protects the one thing we all need most, our income. It pays a tax-free replacement income for as long as you are unable to work until retirement age, which can be up to age 70."
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