How long could you manage if you suddenly lost your source of income? Six months? Six weeks? Six days? Do you just about manage from day to day?
You’re not alone. Most people wouldn’t cope for more than a month (if that) if they suddenly lost their income and many wouldn’t manage more than a week so take heart!
However, this situation cannot continue. Everyone needs to have a ‘savings safety net’, whatever their income, and now is the time to create one. With a savings safety net you can laugh in the face of redundancy and sleep better at night. Here’s how you do it.
- How much money do you need to cope each month?
- Why six months of savings?
- How much does your month cost?
- Set up a savings account
- Start putting money in it
- Do not touch the money!
Now, are you sitting down? Good, because this might hurt: you need to put away between three and six times the amount you need to keep yourself going for one month.
In other words, you should stash away enough cash to keep the roof over your head, and body and soul together, for at least three months and ideally for six months.
- firstly, do a budget and work out how much you need each month to survive – i.e. pay the mortgage or rent, your household bills and basic food, travel and clothing for the month. Nothing fancy, just survival.
- take that amount and multiply it by six. Could you put that money together over the next few months?
- if not, could you get together three months-worth?
- set up a savings account (ideally an instant-access one so that you can get the money in an emergency)
- set up a standing order from your bank account to put money into this savings account every month until you have at least three months-worth of survival money.
- also, if you have a lump of cash somewhere, add that to the pot so that you build it up quickly
- do not touch the money unless you have an emergency!
See below for a step-by-step explanation of how (and why) to do this…
Generally speaking, people have found that it can take up to six months to get yourself back on your feet after a blow like a divorce, job loss or bereavement. These are the kinds of things you need to protect yourself against financially. That’s why advisers and all the big investors say that you need to set up a savings safety net to cover you for this period.
Investors say it, by the way, because you should have money you can access quickly and easily at any time rather than having to dip into your investments.
Investing is for the long-term and the best returns tend to come from products that go up and down a lot in the short-term (like the stock market). Long-term these investments do well, but if you suddenly need to get hold of your money you could find that your investment is in a low period so you won’t have as much as you thought you had.
You need to have your money in a nice, safe savings account for your emergency fund so that you can get hold of it easily and you can know that your investment won’t suddenly tank just at the time you want to get it. Pick an easy-access savings account here.
Now, the next step is to prepare a budget. See this article on how to do a budget for ideas. It doesn’t have to be exact – just write a rough list of the expenses you have each month including, for example:
- Your mortgage or rent
- Your utility bills
- Basic clothes
- Extra for household expenses
Add up that list (or just click ‘calculate’ if you’re using an online budget calculator and there you have your monthly budget.
This is the amount you need to have to keep the roof over your head and body and soul together.
Now multiply this amount. Ideally you need to have at least three times this much in your savings safety net – in fact, having six times that amount would be even better. But aim at least for three times that amount.
If you’ve worked out that it costs you £1,000 a month just to pay the bills then you should aim to put away between £3,000 – £6,000 in your savings account
The money you save for your savings safety net needs to be put into a high-interest savings account and left there. Have a look here for the best savings rates and open up the top one you can find.
Of course, savings rates often change so you should keep an eye on your account to make sure that it’s the best one. Keep checking back once every three months or so to see if your account is still in the top few. If it has dropped down then move your money to the current best buy.
Yeah right. Easy huh? Now there are two ways you can do this:
- You set up a standing order from your current account every month – as much as you can afford – into that savings account until you have enough.
- If you have no extra money each month, you find ways of saving and making money… difficult? No. this is what this website is all about!
Now, we have a very comprehensive article here about how to save when you don’t have any money so have a look at what that says. Remember that the main ways to do this are to:
- Save money on bills and other spending
- Make extra money where you can and
- Throw what’s left over into your savings account until you’ve reached your target.
- Start with your bills. Switch your gas and energy bills to save hundreds over the year. Also switch your car insurance, your home insurance and travel insurance. If you have a mortgage you could save thousands (literally) by switching if you’re out of the fixed rate period. See the articles in our ‘Find Home Bargains’ section for lots of ways to switch to cheaper bills
- Then look at your spending. See how to get cheaper food in this article, cheaper clothes here and cut down on your fuel bills with these tips. There are LOADS of ways to save day-to-day in our Save Money section.
- Also, see which ‘little luxuries’ you can cut out like a morning latte on the way to work, a weekly takeaway or a book-buying habit. See where you can make a cut in your weekly spending and you’ll find you have more money each month to put away.
- Finally, take a look at the ideas in our ‘Making Money‘ section for ways of increasing your income. There are lots of things you could do in your spare time, or with your spare space, that could make you money. This money can be put into your savings account to help build up your pot
… unless you have an emergency. Really – do NOT touch this money at all unless you really, really have to. If I hear of you taking some of that money out when there wasn’t a dire need I’ll come round your house and tell you off!
This money is only to be dipped into if you lose your job or have some other event that stops you making money each month. It’s your safety savings net and it must stay intact until you need it.