Everyone needs a savings safety net – a pot of cash they can dip into if things go pear-shaped.
It’s like having your own, personal insurance policy except that you keep the money – you don’t have to pay an insurance company.
Self-insurance is the best form of financial protection so here’s our comprehensive guide to building up a safety net of savings for you and the family.
- Safety-net savings
- A saving on insurance
- Big purchase savings
- Savings for repairs
- Find out how to pay debts off quickly
This is a savings account that is there to keep you afloat in case the worst happens, such as
- losing your job
- being bereaved
- getting divorced
All of these events (and more) can throw you off course for a bit and stop you earning enough to pay your bills.
That’s when you need a nice pot of cash to dip into to keep you afloat until you get back on your feet.
Step 1: Calculate your monthly outgoings
Do a budget (find out how to do that here) 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,
- pension and investment payments
- 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 out this savings accounts comparison site for the highest paying easy access savings accounts and open one of these.
Easy access savings accounts don’t have the best rates, but you need to be able to get this money in a hurry if you need it.
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 accumulate in your savings safety net.
So go back to your budget, see the total amount of your monthly outgoings and multiply it by three to six times (ideally six times).
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.
Keep in mind the fact that it tends to take people three to six months to bounce back from a tough knock like the ones mentioned above.
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. Nice!
The other advantage of this kind of savings account is that with all the money you have squirrelled away you probably won’t need income protection insurance 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.
Do you have a savings account for a big thing you want to buy?
Or maybe it’s a jar with coins in?
If you have either of those you’re doing well!
In recent years we’ve got out of the habit of saving for big items like a car, a new kitchen or a big holiday in favour of buying them on credit cards or hire purchase.
This is a shame because more often than not it works out cheaper to pay for them with your savings instead – mainly because you don’t have to pay any interest that way.
the good side of credit cards
Credit cards aren’t a complete no-no however. If you know you have enough saved to pay off the bill when it comes through. It can mean that you have extra insurance protection through the card. Any purchases made with a credit card that is between £100 and £30,000 is automatically covered.
Also, with 0% credit cards having lasting for years now, not just months, it can be worth using a 0% on purchases credit card to buy the item then spread the repayments over that time. See here for a really good selection (just choose the 0% ones in the drop down menu)
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.
Check here for free to see if your credit rating is good enough (ideally it needs to be over 700)
set up a special savings account for big purchases
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 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.
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.
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.
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