Why you need a safety net

Life is unpredictable at times, and everyone should have a safety net!

If things go wrong, you have something you could rely on to keep you afloat. This is a great way of protecting yourself financially and can greatly benefit yourself and your loved ones.

Having something put aside can keep you goingthrough a worst-case scenario, be it losing your job to getting divorced or more minor surprises such as an increase in rent or other regular bills.

Even relatively minor events such as these can throw you off course, and not paying them can lead to deeper financial troubles. Sometimes, you just need a reserve that you can dip in to in order to keep you above water until you can get back on your feet.

Depending on who you listen to, experts suggest you should have an emergency fund of three to six months of your expenses. Having this safety net can save you from having to rely on a credit card, loan or line of credit.

So how do you go about setting up a safety net?

The first thing you should do is to calculate your monthly outgoings. This should be a list of essential expenditures such as any mortgage or rent payments, council tax, any utility bills including electricity, gas and water, your monthly grocery bills, pension and transport and any household items and clothing you require throughout the month.

If you have other essential expenses such as child support or people that depend on you, these also need to be included in the budget. Having this budget will mean you know the total amount that you have to spend each month, and a better idea of your outgoings.

When people fall on tough times, such as losing a job or undergoing a personal crisis, it usually takes them somewhere between three and six months to recover.

So if things do go wrong, you should ideally have a minimum of three months’ worth of those essential overheads. This would mean you could cover yourself if the need ever arises. What you need to do is check those outgoings you just calculated for your monthly outgoings, and multiply it by at least three (but, ideally six – there’s much less value in having a shallow safety net!).

So if you had monthly outgoings of £900 a month, then the least you should have set aside is £2700 –this would cover you for those rough three months. But ideally, you would have double that (£5400) to cover you for up to six months. The idea is that you would never have to use it – but there’s always the chance you may need to and that is what you are protecting yourself against.

The right account for the job

If you haven’t started your emergency fund yet, there is no time like the present. The best way to keep the money you are saving for your security net is in a savings account.

There are plenty out there, and many comparison sites you can use to see which ones have the best rates. Looking online for high-yield savings that offer great rates is a good idea, and there are a lot of easy access savings accounts. And while they don’t have the best rates, you will have easy access to your money if you really need it in a hurry.

Automate it

Another great idea is to create an automatic savings plan to build up your cash reserves. You can do this by setting up a recurring deposit every payday. This way, you won’t realise that you are saving money and before you know it you’ll have a serious safety net for that rainy day.

An important thing to remember about your safety net is that it’s not for use unless it’s a genuine emergency – you must not use the money on a holiday, an expensive luxury purchase or Christmas, as it’s there to cover you and your loved ones in case of a crisis.

In most cases, it’s better to be safe than sorry, and that is more often the case than not when it comes to money. Your life and your finances can be made easier and much less stressful by preparing for the future in the present.

We hope we’ve helped!

Thanks for checking out the latest entry in the Citrus blog! The team is here every two weeks to post interesting and useful articles for your benefit.

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