L’precautionary savings (also called an emergency fund, or safety mattress) is a great classic of personal finance. We can also say that it is the ba-ba. The target. the goal? Protect yourself from emergencies and other unexpected expenses by establishing a reserve of money.
Where to start? How much money should you reasonably put aside? What are the steps to follow to accumulate precautionary savings?
The precautionary saving is an immediately available amount of money. It is intended to be used for emergencies and unforeseen expenses. For example: health costs not covered by health insurance, job loss, etc.). It should be dissociated from traditional savings, which finance all non-urgent operations (free time, holidays, etc.).
Precautionary savings should be placed in a liquid, risk-free medium, such as a Livret A or LDDS. Therefore, blocked supports such as the PEL (on which any withdrawal before 4 years leads to the closure of the account) or investment supports (PEA, life insurance, etc.) should be avoided.
A common mistake in Personal finance, is a lack of anticipation. When a large and unplanned expense occurs, it’s easy to panic and make bad decisions. For example, emptying your checking account, or taking out a high-rate personal loan.
The existence of precautionary savings makes it possible to cope with this type of eventuality and to guarantee a certain peace of mind. It is a form ofrisk insurance life and the sudden expenses that are sometimes associated with it. In this regard, several studies have shown a link between precautionary savings and … Happiness !
It is customary to say that an emergency fund must contain from three to six months of expensesor salary from three to six months. However, this is a recommendation, not an absolute rule.
It all really depends on your personal situation. If you have a steady job and own your home, your precautionary savings will be less than that of a tenant, whose income is likely to vary.
In addition, the feeling of “serenity” felt by a person towards his savings belongs to him. It depends on a variety of factors. If you think, given your personal situation, that a precautionary saving of 5,000 euros is sufficient, or if you are not comfortable with the idea of holding a larger sum, do not try to save for years. Remember: every situation is different!
How do you know the amount of your precautionary savings? You can calculate the amount of your monthly expenses: rent or loan repayment, transportation, food, utility bills, etc. This sum must then be multiplied from three to six. The result corresponds to the ideal amount of your precautionary savings.
Another method is to multiply the amount of his current salary by three (four, five or six). This necessarily results in a larger amount, but also more reassuring for some.
Whatever the method chosen, the precautionary savings must be able to cover minimum tied expenses for a period ranging from 3 to 6 months.
An example
A person chooses to build precautionary savings based on the amount of their monthly salary. If you earn 3,000 euros a month but can temporarily reduce your lifestyle to 2,000 euros a month, the amount of your precautionary savings must be between:
3 months’ salary :
3 x 2,000 = € 6,000 of precautionary savings
6 months’ salary:
6 x 2,000 = € 12,000 precautionary savings.
In any case, the most important thing is to start accumulating your precautionary savings as soon as possible and make it a priority in your savings strategy. It is not necessary to set aside large quantities immediately: more than quantity, it is regularity that prevails.
A good way to accumulate precautionary savings is to respect the 50-30-20 rulewhich consists of allocating 50% or less of one’s monthly income to basic needs (housing, food, transport), 30% to leisure time and 20% to savings.
If you want to save € 10,000, you will first need to evaluate your savings capacity. For example, by setting aside € 200 each month, you can accumulate your precautionary savings in about 4 years. Does it seem long to you? Get into the habit of treating savings as a fixed expense item: the more constant and regular you are, the faster the goal will be achieved.
Here, moreover, some suggestions to be put in place to quickly accumulate precautionary savings:
- Establish a monthly budget and stick to it;
- Schedule automatic monthly transfers to streamline the savings effort over time and thus avoid fragmentary savings;
- Redirect all or part of exceptional cash inflows (gifts, bonuses, etc.) to precautionary savings.
Building precautionary savings is only the first step. Once this reserve has been built up, it is time, if your savings capacity allows it, to move on to a investment strategy correct. The nature of your investments should be chosen based on your objectives (purchase of a primary or secondary residence, retirement, etc.), your investment horizon (medium or long term) and your sensitivity to risk.
Many possibilities open up to you: on Lendopolis we offer it to youinvesting in the energy transitionadvantageous for you (yield from 3 to 7%) and for the planet.
If you place more importance on safety, risk-free media can house your savings, up to € 12,000 for the LDDS, € 22,950 for the Livret A and € 61,200 for the PEL.