It’s good to have a financial buffer for unforeseen expenses. But how big does your buffer need to be? How do you build up this amount and what can you do when you’ve reached your savings goal? Find out more below.
Having the odd financial setback is simply a fact of life, which is why ABN AMRO advises all savers to build up a financial buffer. Take car repairs that are more expensive than you’d bargained for, a broken dishwasher or a higher bill than expected from your energy provider or the tax authorities. If you can rely on a buffer for these setbacks, your current account won’t suffer and there will be no need for an overdraft or loan.
The Dutch National Institute for Family Finance Information Nibud advises setting aside at least 10% of your net income every month . This will help you to build up a good buffer. To find out what your minimum buffer should be, use the Nibud buffer calculator . This tool calculates your personal recommended buffer, based on your specific situation.
The best way of saving for a financial buffer is in a freely accessible savings account. This allows you to withdraw your savings if you need the money. If you know roughly how much you’d like your buffer to be, you can save until you reach this amount. The fastest way to build up a buffer is to save a fixed amount every month through Automatic Savings. The amount you save each month is up to you and depends on your income and expenditure. Take a close look at your budget and work out how much you can afford to save each month.
Don’t worry if you have to use your financial buffer for unforeseen expenses. After all, that’s what it’s there for. But don’t forget to build it up again afterwards, so you’ll always have enough money for unforeseen expenses.
If your personal circumstances change, your financial situation may change too. For example, you might want to buy a bigger house or a house that needs a lot of upkeep. Check that your current buffer is still large enough.
Inflation is when the overall price of goods and services rises, meaning that you can buy less for your money today than you could yesterday. This is also true of the money in your savings account; if there is inflation, you’ll be able to buy less with the money you’ve saved than when you first deposited it. This is the case if the savings interest rate is lower than inflation, for example, or if you don’t receive interest or have to pay interest on your savings. If inflation is higher than the savings interest rate, the value of your savings will go down. This also applies to your purchasing power.
However, the opposite is also true. In a favourable climate, you’ll receive interest on your savings. If the savings interest rate is higher than inflation, your savings will be worth more. This is because the interest you receive more than compensates for the drop in the value of your savings. Your purchasing power will also increase.
If you’ve saved enough for your buffer, you might want to consider other savings goals. Perhaps you’d now like to save for a new car or a special holiday. If so, open a separate savings account and link a savings goal to it. This helps you to keep an eye on everything. Or maybe you want to set aside some money to give your child a good start in life. If so, you can open a savings account for your child. Or you could use the money you have left over in a completely different way. Take a look at the alternatives to saving: start investing, pay off your mortgage or build up extra pension.
