No one wants to spend their time contemplating the worst, let alone preparing for it.
But when an unforeseen expense occurs, a lot of anguish and sometimes great financial consequences can await you.
The solution ? Have precautionary savings already ready.
Precautionary savings is a classic in personal finance. And yet, many people simply do not have one.
Its purpose is to protect you from all unforeseen expenses, whether large or small.
Because if unexpected situations – be it a dental crown or a dismissal – are an inevitable reality. But nothing prevents you from preparing for it.
Precautionary savings, what is it?
Precautionary savings ( also sometimes referred to as a “safety cushion” or “emergency fund”) is a sum of money set aside to cover one or more unforeseen expenses that may arise in the future.
It can, for example, help you finance the replacement of a broken device or medical interventions not covered by your health insurance.
In the event of an unexpected change in your financial situation, such as a job loss, for example, precautionary savings can also allow you to get back on your feet while maintaining a certain level of comfort.
The most common mistake when it comes to managing personal finances is being unprepared for the future . And in an emergency, panic quickly sets in, and bad decisions follow one another (request for high-rate loans, etc.). To avoid this situation, this is where the emergency fund comes in: it allows you to predict the vagaries of the future in advance.
Your precautionary savings are therefore made to be built up as soon as possible. .. then immediately forgotten.
It will be necessary to resist the temptation to use these sums to pay for unforeseen but non-urgent expenses (such as Christmas gifts or pleasure purchases). The best way to manage your safety cushion is to pretend it doesn’t exist.
Have I got really need precautionary savings?
This is often objection number 1: why should I set aside for a problem that does not yet exist – and may never exist?
Not planning to deal with future emergencies is to inflict unnecessary anguish on yourself when the time comes. Because if you’re not sure you want to sacrifice some superfluous monthly expenses to fund a safety cushion, one thing is certain: these financial emergencies are bound to happen one day .
And I can assure you that the panic situation in which you can find yourself is much less pleasant than depriving yourself of an extra drink during an evening with friends to finance our emergency fund.
Precautionary savings allow you to approach unforeseen expenses in a much more serene way . Because the best way not to have to take the lead with your finances is to get ahead and anticipate.
Although it may seem like a real sacrifice, putting money aside each month to gradually build up your precautionary savings will give you real peace of mind. And the sooner you start using your emergency fund, the sooner you can reap these benefits.
Where should I place my precautionary savings?
Precautionary savings are made to cover, as its name suggests, emergencies. It is therefore essential that your money is quickly accessible when needed .
Blocked booklets (like the PEL) or investment solutions ( PEA , etc.) are therefore to be banned. Classic booklets, such as a Livret A, can be quite suitable.
In any case, avoid placing this money in an account that you use daily, such as your current account. That way, you won’t be tempted to dig into your reserves for a non-urgent purchase or pleasure.
The ideal is to schedule automatic internal transfers from your bank . You can therefore ask to move a sum of money from your current account to one of your savings accounts each month.
For example, you can choose to make this transfer immediately after your pay has been paid. Most banks allow you to do this directly online.
How much should you set aside?
Most specialists recommend creating a precautionary savings large enough to cover between 3 to 6 months of expenses. This is usually enough to cover most unexpected expenses, or to give you time to get back on your feet.
The most important thing is not to wait before starting to build your emergency fund.
3 to 6 months of expenses represents a significant sum: it will therefore take you a long time before you can reach your goal. The best thing is to go little by little, without letting yourself be impressed by the amounts. Remember: “A journey of a thousand miles begins with a single step” .
How to build your security savings?
1.Build your monthly budget
Before you can start saving, you will need to define your monthly expenses. In other words, it’s about creating a budget . For this you will need:
- Write down your salary – what is your income? Salary, APL, CAF aid… list all your cash receipts.
- List your fixed expenses and mandatory bills. Housing, food, and transportation are likely to be the categories that consume the most money.
- Multiply your monthly expenses by 3, then by 6. You will therefore obtain a range corresponding to the sums that you will have to set aside for your precautionary savings.
2.Set the amount to set aside each month
If you haven’t started building your emergency fund yet, don’t worry: it’s best to start small and scale your savings as you go. There is no point in wanting to build up an entire precautionary savings in just a few months.
The point is just to set yourself a goal and then get into the habit of making regular deposits into your account. Create a schedule, and stick to it, even if it’s only $30 a month to start with. Once you get used to it, you can gradually increase the amounts.
To guide you on how much to set aside, subtract your monthly expenses from your total income . The result is the money you have left per month to save or use for all non-compulsory expenses (leisure, clothing, restaurant…). It is in this amount that you will draw to build your security savings.
3.Build your precautionary savings
The last step and probably the easiest: get started! There’s no point in waiting – the best time to start is now .
Nobody likes to think about emergencies. Nor see them arrive.
They remind us that we can’t control everything – but we can prepare.
In a sense, having precautionary savings helps you stay in control . It avoids stress and panic in the event of a problem, and having to subscribe to credits to get out of it.
Of course, building your emergency fund takes time and work. But you’ll also have enormous peace of mind knowing that you can manage your unexpected expenses.