Millions of adults in the UK don’t have huge savings, and a lot of Brits don’t have any savings at all. While this might be for a number of factors, including not thinking it’s necessary, not having spare disposable income or even just not getting round to starting, having savings means protecting yourself against credit dependency and cashflow shortfalls.
Credit dependency is where you rely on access to credit to manage your finances and meet unexpected bills. For example, if you frequently enter your overdraft throughout the month, it could mean you depend on borrowing to avoid missing bill payments. While there’s nothing wrong with using credit from time to time, you might be charged interest for your borrowing which means it costs you money every time you have to borrow to meet your regular payments. Plus, frequently using credit can impact your credit score.
“Cashflow” is a general term to summarise your income and expenditure throughout the month. A cashflow shortfall is when you don’t have enough money to cover all of your expenses in that month. It’s not an unusual occurrence for most people and some people are better equipped to deal with financial disruptions than others. Managing your cashflow can include using your savings, applying for a loan, or even just using your overdraft. The best way to manage your cashflow on a long term basis is to have an accurate budget which allows you to save small amounts of cash from time to time to meet occasional unexpected payments.
Having a small amount of savings goes a long way. You don’t need thousands upon thousands to feel financially secure. Even just having £250 tucked away will help you manage unexpected bills and things like MOTs and house insurance payments which occur on an annual basis and might catch you out. While it’s good to have an achievable target when you start to save, don’t stop saving once you reach it. If an emergency payment does arise and you use the funds you’ve saved, you’ll be back at square one. Having regular, small payments funnelled into a separate savings account will help you manage your cashflow and decrease your reliance on credit.
Of course, the more savings you have, the better equipped you’ll be to deal with any irregular payments – big or small. From a new tyre to a new car, there’s no end to the array of reasons you might need savings so pinpointing an exact amount is a very circumstance-specific task.
A general rule of thumb is to have 3 months’ salary in savings. The idea is that if the worst happens and you lose your job, your priority bills and essential expenditure will be covered for at least three months while you look for another job. This often helps people manage the stress that comes with being unemployed, meaning you can focus on getting a new job, perform better in interviews and handle your usual daily tasks.
Otherwise, just try and save as much as you can. You don’t need to become paranoid about money but actively trying to improve your financial circumstances through safety-net savings will pay-off in the future. There’s no reason you can’t use some of your savings towards things like holidays or gifts for loved ones, but make sure you have any potential emergency issues covered first.
Ultimately, building up savings takes time so you have to start somewhere. You might have to be proactive in your efforts at first, but as you create saving habits, the process will become effortless and you’ll start to see your savings grow with minimal interference. It might not mean you never need to borrow again, but it will help to reduce the amount you need to borrow and frequency of using credit.
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