If you’re worried about life’s uncertainties and how they may impact your financial future, you’re not alone.
We know that thinking about how to keep on top of financial responsibilities isn’t fun, especially thinking about unexpected expenses or a financial emergency. However, life rarely goes as planned, and it might be time to consider what type of financial safety net you have in place, in case something goes wrong.
Setting up a financial safety net or emergency fund is an effective way to safeguard your budget and ensure that unexpected expenses don’t put you in financial trouble. Having a money safety net when emergencies occur will not only reduce your financial stress but also improve your overall well being.
1 in 10 people in the UK have no savings at all, meaning that building a financial safety net should be an essential part of your personal financial journey.
In this article, we’ll take a closer look at financial safety nets, how much money you should ideally save, and some tips to help you build a reliable safety net.
What Is a Financial Safety Net?
A financial safety net is what you put in place to protect your finances from life’s uncertainties. At its simplest, it is a stash of savings that can be quickly accessed to help you cover essential expenses if the worst were to happen.
Whether it's a car breakdown, getting your hours cut, or unexpected home repairs, your safety net is there to help you cover immediate expenses and give you time to get back on your feet.
Your financial safety net, as the name suggests, is there to catch you if you ever need it, allowing you to make the best out of an unfortunate situation. Whilst you hope you’ll never need it, people rarely regret creating a solid financial plan.
How Big Should My Financial Safety Net Be?
If you’re considering building a pot of savings or an emergency fund as part of your financial safety net, it’s useful to have a target amount you’d like to save.
Typically, working out the amount of money for your safety net depends on your specific circumstances. For example, factors like your earnings and how easy it would be to find another job should be considered.
A financial safety net or emergency fund is unique for every person. So, think about what costs could arise across different areas of your life and set your budget accordingly.
Whilst financial experts suggest 3-6 months’ of basic living expenses is a good amount to save for your emergency fund, if you struggle with saving, why not start by aiming for 1?.
To calculate what this would be for you, first, examine your budget. Then, list down all your monthly expenses, such as rent, groceries, utility bills, etc. Finally, add up all your expenses and multiply the final figure by how many months of safety net you need.
If you do dip into your emergency fund, remember to top it up again so it’ll eventually get back to the target you’d set for yourself. This ensures that your financial safety net is ready to take care of you in the future as well.
How to Build a Financial Safety Net
Building a financial safety net doesn’t have to be challenging. Let’s take a look at some of the key steps to building a safety net for yourself when money’s tight.
1) Create a Budget
Begin by mapping out a budget and working out a realistic amount of money that you can set aside each month after paying your essential expenses, such as rent, food costs, utilities, and debt (if you have any).
When money’s tight, it might not feel like you have any extra money to spare. However by budgeting any money you can afford towards your financial safety net, you might be surprised how quickly it can grow.
Track your average income and fixed expenses to calculate the amount you’ll need to cover your monthly expenses and create a realistic budget. There’s no right or wrong way to build a safety net and it’s important to take the approach that works best for you.
2) Prioritise Needs, Wants and Savings
Once you have an understanding of your income and spending habits, you can allocate money for your needs, wants, and savings. The amount you save determines how quickly you can create your money safety net and achieve your saving goals.
3) Pay Yourself First
If you’re going through a financial rough patch, set up an automatic payment into your savings account for when you get paid. This will increase your chances of sticking to your budget and help you build a strong financial safety net. You can always dip into it again if needed, but it helps build automatic healthy financial habits.
Choose Salad Money for Fair and Affordable Personal Loans
Now that you understand what a financial safety net is and how it works, it may be time to build your own safety net to be prepared for any unexpected events. It’s important to remember that while everyone’s safety net may look different, the sooner you start saving and putting money aside, the more prepared you will be.
At Salad Money, we care about your financial wellness. We recognise that life can be unpredictable, and sometimes you might find yourself in need of some financial support. That’s why we offer fair and affordable personal loans to help you during challenging times.
As a leading online lender, we help you access the money you need to regain control of your finances. Our ‘More Than Your Score’ loans provide you with financial support when you need it the most.
Using Open Banking technology, we analyse loan affordability based on your current financial situation, instead of just your credit score. As an FCA-regulated and authorised organisation, we keep your data safe and secure.
Apply for our personal loans now and to read more blogs like this one, visit our blog page.
