With the global pandemic and the resulting financial crisis, we have seen the importance of precautionary savings. Some entrepreneurs found themselves with 0 inflow of money, and partially unemployed employees with only 84% of their salary and less money on the side (fewer bonuses, less overtime, fewer benefits, etc.). Of course, no one could predict this crisis, just as no one can prevent other events: a work accident, car accident, job loss, etc. Let it be said, I don’t wish this on you, but it’s important to be able to protect yourself in the event of a problem… and precautionary savings are there for that! We will see in this article how to build your precautionary savings and how much to have in precautionary savings.
Why have precautionary savings?
The accidents of life happen:
- Job Loss,
The unexpected too:
- car failing,
- water damage…
I know these are things you don’t necessarily want to talk about, but unfortunately, these are things that happen in life. Precautionary savings are there in case of a hard blow, to protect you from all that. With this precautionary savings, you must be able to pay your expenses for several months. We will see in the rest of the article for how many months.
With precautionary savings, you avoid debts, overdrafts… In short, you manage your money better. I don’t know about you, but when my security savings are sufficient, I feel better. This plays on my morale, I am less stressed. Here what these security savings.
Precautionary savings: what type of support?
Precautionary savings must not be in a blocked medium such as life insurance, PEL, etc. but rather on a medium where you can withdraw the money quickly. Your wife/husband/spouse should also have access to it in case you are unable to withdraw the money yourself. So prefer support like booklet A or the LDD. These are low-paying media, we know that, but that’s not what we’re looking for. We are just trying to save money in case of a hard blow. If you have exceeded the ceiling of your livret A, you can open an LDD to continue saving your money.
How much precautionary savings do you need?
Precautionary savings must be calculated in charge months. We consider that it is necessary to minimum 6 months of charge in precautionary savings, the ideal being even 1 year of charges. This means that, if you have no more cash inflows, you can still live for 6 months, up to 1 year, just on your precautionary savings. You still need to know your expenses to establish the amount of precautionary savings… For this, it is important to establish a monthly budget. To do this, you just have to list on a paper or on an Excel budget file your vital expenses, then add up the total and you then have the number of your monthly expenses. You just have to multiply this amount by the number of months, so between 6 and 12.
I insist on the fact that 6 months is a minimum, and when I speak of charges, I speak of vital charges!
The cinema card is not a vital cost, nor is the shopping budget. Vital expenses are insurance, rent, taxes, groceries, etc.
Example: You have 1500€ of expenses, you must place 1500 x 6 months = 9000€ minimum.
And 1500 x 12 = 18,000€.
In this example, it is advisable to save between €9,000 and €18,000.
Good to know: Do not inflate the precautionary savings amount. You must save only the vital charges for 6 to 12 months maximum, the rest must be placed. Why, will you tell me? You may not be able to save the amount if you set the amount too high. You also risk depriving yourself of this, and these savings can become a burden! Moreover, when you put your money on a booklet A remunerated at 0.50% (which does not cover inflation), your money works very little. There are many more interesting investments, I will talk about them later in the article.
We get to the heart of this article, namely how to build up your precautionary savings.
It is with regularity and a few tools that you will be able to save your precautionary savings.
First of all, upon receipt of your salary, you must save at least 10% of your income. Your savings must be calculated as a fixed expense, as an expense, and not as money that you invest at the end of the month when you have paid everything. Instead, you should do the opposite and put your money aside at the beginning of the month, just after receiving your salary.
Secondly, you will automate your savings. Concretely, you will set up an automatic transfer just after receiving your salary in your account. Leave yourself a margin: imagine that you receive your salary on the 5th, then set up the transfer on the 8th. Why 3 days later? Because depending on whether it falls on a weekend or a public holiday, your salary can arrive on the 5th as it can arrive on the 6th or the 7th. By leaving yourself a margin, you are sure that your salary has arrived and thus avoid overdraft risk.
Thirdly, take charge as soon as possible. It is not easy to build up 1 year of charges in the snap of a finger, but the sooner you do it and the more regular you are, the more likely you are to build up your security savings and above all to succeed in investing the amount. wish.
Fourth, managing your budget well is a basis for managing to save well. If you control your expenses, reduce your expenses and thus establish a family budget each month, then it will be easier for you to save and therefore to build up these famous precautionary savings. Good practice in budget management is to manage your budget with the 50/30/20 method.
fifth you can boost your savings with the 52 weeks savings challenge which allows you to save €1378 effortlessly.
I have used my precautionary savings, what should I do?
You had to face an unforeseen event and use part of your savings… Now you have to replenish it! These savings must always be there and adapt according to your expenses. Indeed, if your expenses increase, then you must also increase your savings. It is therefore important to be careful not to increase your expenses too much and even to reduce them.
Where to put the rest of the money?
Once the precautionary savings have been reconstituted, there is no point in leaving the surplus on supports such as the LDD or the livret A, which is remunerated at 0.5% (less than inflation). You will have to boost your savings by placing your money elsewhere.
For example, you will be able to invest in real estate via SCPIs, which allows you to obtain yields between 4 and 6% net. Be careful, there are many SCPIs on the market and it is important to choose well. I, therefore, recommend that you train yourself. Here is an excellent book to read: Become an annuitant with the SCPI.
You can also consider investing your money in the stock market. Contrary to what some people think, the stock market is not risky, as long as you train and choose the right stocks. You have to understand one thing: as long as you don’t sell, you don’t lose money. All you have to do is invest money that you don’t need right now, and make this investment for the long term. Indeed, over the long term (10 years), the stock market only goes up, so you will be a winner. You can expect returns between 2 and 10%. Of course, I recommend that you train before you start. Here is an excellent book: Becoming an Annuitant with Dividend Stocks.
If you wish to have more additional information on financial investments here are 7 top investments to invest your money.