Many people – through no fault of their own – have found themselves in a position where they have had a reduced level of income over recent months. From self-employed people who have been unable to work, through to retirees who have reduced income to avoid drawing down from depleted funds, and a great many different scenarios in between, you don’t need to look very far to find someone whose financial security has suddenly and unexpectedly come under threat.
No-one could have predicted this pandemic a year ago; if we could, many people may have done lots of things very differently. But this just goes to demonstrate the point that we never know what’s around the corner and being prepared financially can provide great peace of mind in the event of the unexpected.
As the past few months have amplified, relatively few people in the population at large have a ‘rainy day fund’ to fall back upon should they need it. Statistics1 indicate that a third Brits have less than £600 in savings with 1 in 10 having no savings at all. A further worrying statistic is that 40.93% of Brits don’t have enough savings to live for a month without income.
One of the key fundamental elements when we begin putting a financial plan in place with a client is an ‘emergency fund’. Although the exact amount varies from person to person depending on circumstances and preferences, the general consensus is that this should be somewhere in the region of 6 months to a year’s worth of income.
One comment we have heard from clients time and time again during the course of this difficult period has been ‘at least I have savings to fall back on’ – or words to this effect.
Here are five tips to building up your own emergency fund…
Look for day to day savings
With so many parts of our lives having been restricted during lockdown, it’s possible that the period highlighted some of the areas where savings in day to day spending could be made. For example, not being able to eat out, buy coffees or have regular hair or beauty treatments.
Although many people will find themselves with less income as a result of the Coronavirus crisis, conversely, there are some individuals and families who may find that they have been able to accumulate savings due to not being able spend in the normal way. In fact, some surveys have found that 70% of people have actually managed to save during lockdown. Whether it’s saving on the cost of commuting, days out or buying coffees and snacks, these mount up on a week by week and month by month basis. Rather than simply reverting to old ways as more of these options become available, it could be a good time to rethink what you spend and try and divert more everyday costs into savings.
There’s no doubt about it, saving up takes discipline. We would all like to be able to afford to buy anything we want to as well as having money set aside for a rainy day or as part of our plans for the future, but for most of us, this simply isn’t possible. Regardless of your income and how much you can afford to save or invest, any sort of financial planning involves making a plan and sticking to it. There will almost always be some sacrifices and choices to make, but try to remember the end goal and what you’re saving towards.
Get to grips with your finances
Being able to save effectively requires a good understanding of your financial situation, and how much money you have available to set aside for your future. Most people get paid every month, so listing your monthly income and expenditure is a good place to start. It is also worth bearing in mind that you will have some larger annual costs – such as some insurance premiums or annual subscriptions. Taking all of this into account, you should be able to work out a rough amount that you have that is surplus to your spending requirements on a monthly basis. From here, it is up to you to decide how much you are comfortable or willing to set aside each month or year. As above, it may be worth looking at what items are ‘essential’ in your spending and what are ‘optional’, and how you may be able to utilise more of your optional expenditure into savings, whilst remembering that the things you spend money on today come at the additional cost of what you will have available to spend in the future.
Making a conscious decision to set up an ISA and make payments into it isn’t something that everybody has the resources to do. But the good news is that technology has evolved rapidly over recent years and there are numerous online tools and apps aimed at helping people build up savings in small increments. For example, there are apps that round up everyday spending to the nearest pound, setting the money into a pot for investing or saving. Although you’re unlikely to be able to sail away into the sunset using this approach, it’s a great place to start for those with little ‘disposable’ income.
Pay yourself first
Move money into savings accounts on payday so it’s not tempting to spend your ‘future fund.’ When trying to build up savings, it can be easier to build the process of saving into your monthly expenditure plan, even automating the process by way of a direct debit or standing order. Taking the manual process out of the equation means that saving can take place without you having to think about it.
Equally, making monthly contributions can, for some, make saving and indeed investing more manageable. When investing on a monthly basis you also benefit from ‘pound cost averaging,’ which helps to mitigate risks relating to market timing.
Although these tips are written with the idea of building up an emergency fund in mind, in fact, they apply to anyone at any stage of the financial planning journey. An emergency can hit anyone at any stage as the Covid-19 pandemic has demonstrated.
For more information on any of the above points or to discuss starting your own journey into savings and investments, please get in touch with one of our financial advisers.