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Self-insurance is the best form of financial protection so here’s our comprehensive guide to building up a safety net of savings. Financial safety and saving money to rely on has never been so important.

There are currently 2.67 million unemployed in the UK – the highest level since mid-1995 – and the negative effects of the recession aren’t going to disappear overnight.  Despite this, many of us are still failing to protect against the potential financial pitfalls.

Indeed two thirds of people (62%) have no savings safety net in place should they lose their household’s main income, according to research from Scottish Widows.

So here are the different types of saving we should all be doing to ensure we safeguard our financial safety:

• Safety-net savings
• Big purchase savings
• Repair savings
• Different types of savings suit different goals, but one thing is true for the lot – pay off your debts before starting to save. Find out how to pay them off quickly and simply here.

Safety-net savings

This is a savings account that is there to keep you afloat in case the worst happens. For example, what would you do if you lost your job or a loved one or got divorced? You might not be able to earn anything for months.

We all need to make sure we have the financial back-up to keep us going through rough times and make sure, at the very least, that we hold on to the roof over our head.

Step 1:  Calculate your monthly outgoings

Use our simple budget calculator to work out your essential monthly outgoings. Include everything you have to spend to keep body and soul together and the roof over your head.

Remember to include things such as mortgage payments or rent, council tax, electricity, food, clothing, pension and investment payments and transport costs. You should also factor in household cleaning products, emergency money for children and child support if you are paying that.

Now you know what the total amount is that you have to spend every month to keep going.

Step 2:  Open a savings account

Check our savings article for the highest interest-rate savings accounts and open one of these. Make sure you go for the best rate and check it every now and then (about once every six months should do). This will be your savings safety-net.

The account should be instant or easy access – there’s not much point in a safety net that you can’t access for years. However, the privilege of flexibility and easy access usually comes at the expense of preferential rates so it’s vital to shop around to find the best.

Don’t forget to watch out for bonus rates – many instant/easy access accounts include a limited-time interest rate bonus, so make sure you switch to a better account once the bonus period ends.

Step 3: Multiply your monthly outgoings by at least three

The average time to get back on your feet after job loss or a personal crisis is between three and six months – so three months outgoings should be the absolute minimum amount you save. Take your monthly outgoings amount and multiply it by three to six times.

That is how much you should be aiming to put in a high interest account. For example, if you worked out that your monthly essential outgoings are £1,000 then you would need to save at least £3,000. That’s a good amount to have in the bank but £6,000 is even better and will mean you and your family are covered for up to six months. It’s up to you.

The most important thing to remember is that you do not touch the money unless it’s a real emergency because these are your safety-net savings. This money is not for Christmas or a holiday but to cover you and your family in a crisis. If you are lucky and you never need to fall back on the savings then you have a nice little nest-egg growing, with interest.

The other advantage of this kind of savings account is that with all the money you have squirreled away you won’t need income or mortgage protection insurance. Apart from the fact that this kind of insurance tends to only kick in after six months, you never get back the money you put into an insurance policy unless something bad happens.

By setting up this savings safety-net, though, you will have managed to insure yourself and, if nothing happens, the money you have saved is yours to keep.

For some people, though, income protection insurance is still useful. Have a look here to compare income protection insurance rates. Or, you may find critical illness insurance more useful for your needs to protect you and your family.

Big purchase savings

In recent years we’ve got out of the habit of saving for big purchases like a car, a new kitchen or a big holiday in favour of buying them on credit cards or hire purchase. More often than not it works out cheaper to pay for them with your savings instead – you don’t have to pay any interest that way.

Credit cards aren’t a complete no-no however. If you know you have enough saved to pay off the bill in about a year then it’s worth using a 0% on purchases credit card.

You’ll get a period of time to pay back your big spend without being charged any interest. Make sure you can afford to pay it all off before the interest-free period ends though, or you’ll be back to square one.

You’ll need a good credit rating to be eligible for a 0% purchase card, so if yours isn’t up to scratch then simply saving up is the cheapest alternative.

If you can wait to buy your big purchase then a great option is a regular savings account. You only need to put a little away each month, and it’ll earn you more interest than if your money was in an easy access account.

The only drawback? You can’t touch it for the whole 12 months or you’ll lose the interest – so you need to be patient!

The amount you put in depends entirely on you – how much you can afford each month and how much you need to save up.  Even when you think you can’t afford to save there are still ways of putting a bit aside. Have a look at our advice on how to save when you haven’t got any money.

Repair savings

You know the drill, you stagger to the check-out with your new and weighty electrical purchase and the sales staff try to flog you some kind of retail warranty to guarantee your purchase. But you don’t need it!

You already have a manufacturer’s warranty for the item – normally buried in the packaging – which can often be extended. And, you are already covered by the Sale of Goods Act 1979 which says that an item should be fit for use for a reasonable amount of time. This can be for up to six years after the purchase.

The amount they charge for extra retail warranties is usually much more than the cost of getting the thing mended (according to the consumers’ association Which?). After all, the assistants make commission out of them and the insurance companies make billions each year out of them so the money has to be coming from somewhere!

Most quality electrical goods are built to last for at least two years. It just takes a bit of research to pick quality. In fact, it’s always a good idea to look at Which? research first before buying any major electrical item. Don’t be fooled by a fancy brand name. You could even ask friends and family for recommendations.

A far better and cheaper way to deal with possible repair bills is to set up a small savings account specifically for the purpose. Put a small amount of money into this each month and if you need to get something mended you can just dip into it.

If you never need to get anything mended then you will have all that money quietly making interest for you each year. This is another example of self-insurance – the best kind of insurance to have.