One lesson we’ve all learned from 2020 is that life can change very quickly. Because life and plans change, often unexpectedly, it’s a good idea to have a plan to cope with any financial setbacks.
Myfuture - Four Steps to Financial Fitness outlines positive steps you can take to make a big difference for your financial wellbeing, including supercharging your savings. Below we answer five common questions about contingency savings.
How much cash should I save?
Start by aiming to have contingency savings equivalent to one month’s income. Though you might want to think about how long you could survive if you lost your job tomorrow. It's ideal to have at least 3 months income saved to prepare for the unexpected.
If you're single or have support from family members, you might be comfortable with less savings. However, if you have a spouse, children to support, and a mortgage, or worry about replacing a lost job or other income quickly, you might feel better with 6 months or more of savings.
What about borrowing?
In some cases, you may consider borrowing if you don't have the financial reserves to cover your expenses. If you are borrowing against your home, it's extremely important to consider the potential consequences. There may be financial, legal and tax implications and if you default on the loan, you could even lose your home.
If you've lost income, borrowing money can be risky. Debt can quickly snowball if you're not able to pay it off at the end of the month. If you need to borrow, make sure to keep interest rates as low as possible. You can get free and impartial money advice at The Money Advice Service.
How can I save more?
There are a couple of ways to boost savings, even on a tight budget. A top tip for saving is to treat it like you are paying yourself - think of your savings fund as a monthly outgoing. Consider opening a separate savings account and set up a regular standing order to divert savings as soon as you get paid.
Focus on trimming spending where you can. As many of us continue to work from home, some expenses may have temporarily gone away, like commuting costs and buying lunches and coffees. Directing some of that money to savings could be a good way to help bolster your contingency fund quickly.
Where should I keep my savings?
Consider how quickly you might need access to your money if an unexpected event comes up. Generally, keeping your contingency savings accessible is a good idea. However, avoid dipping into your contingency, it can also make sense to in a different account from your spending money and other types of savings.
Can insurance help protect me?
Besides having cash that you can access quickly, insurance is another way to be prepared. Think about life insurance to protect your family and consider looking into critical illness and income protection insurance. Whether you have it through work or on your own, you'll want to know that you have enough in the event something unexpected happens.
The bottom line
Everyone needs some contingency savings — no matter how old you are or what your income level is. The current pandemic is the latest reminder but there are many other circumstances that could require having extra cash on hand — losing a job, natural disasters, a leaky roof, unexpected childcare expenses, or family members returning home or needing help. Planning ahead is key. If you're diligent about saving, you'll be more prepared for what life throws at you. And that can help give you some peace of mind.
Important information: The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.