From our archive. This article was published on 13 April 2020. Rules and amounts may have changed since.
Temporary unemployment (due to force majeure), losing your job, ending up on sickness benefit, suddenly a large unforeseen expense,... all scenarios that are not hard to imagine in today’s society, in the current and future economic climate that still lies ahead of us. You may already be in one of these situations today and already feel that things are quite a bit harder financially. Even if you receive a replacement income, it is usually quite a bit lower than your salary.
Temporary unemployment (due to force majeure), losing your job, ending up on sickness benefit or suddenly facing a large, unexpected expense for a broken-down car: all scenarios that can happen to you out of the blue in today’s society. Not only in a crisis, but also simply in your everyday life. You may already be in one of these situations today and already feel that things are quite a bit harder financially. Even if you receive a replacement income, it is usually quite a bit lower than your salary.
It may be easy to say, but having enough financial reserves is essential to be able to absorb periods of falling income or rising costs. Building a financial buffer at the moment you need one is almost a lost cause, so it is vital to prepare for bad days. Save on good days, for the worse days that may come. Emergencies simply always arise at the worst possible moments in your life, and that is precisely why everyone needs an emergency fund.
If you live alone, your personal buffer is easier to determine and build up than a buffer for, say, a family with 3 children. The rule of thumb is that you should have at least 3 months’ net salary in your account as a buffer. If you are self-employed, we would ideally like to see this at 6 months, because the risk of losing income is greater and can also happen more quickly. Your personal buffer is therefore necessary. If you still receive 60% of your salary, you can use this buffer for a few months to absorb the loss of income during that period.
If you want to build up a family buffer, that depends on your combined standard of living, the make-up of your family and, for example, your housing situation too: if you live in a rented house, you typically need less of a buffer than if you own your home. The risk of unexpected repair costs - think of a leaking roof, for example - is simply down to you if you own your own house. In addition to the family buffer, it is a good idea to build up a personal buffer as well, to absorb any loss of income and avoid putting the household budget in difficulty.
Your iron buffer is a savings reserve for when things go wrong, and you preferably put it in a savings account that you cannot access directly. It is best not to link this to your current account, which you use for your daily and monthly spending. That way you are less easily tempted to dip into this buffer.
In addition, try to build up a buffer for setbacks as well; we call this your unforeseen expenses buffer. Think of an extra reserve for the washing machine that breaks down, a high water or energy bill, and so on. So, besides “buffers”, you can also build savings pots: a savings pot for a new washing machine or tumble dryer, or a savings pot for your next car...
Where do you stand? Do you have an iron buffer? Are you prepared for a financial setback? Do the calculation yourself and work out how much money you need to set aside in a savings account that you can access daily to absorb emergencies. Do you have questions about how to build up buffers for you and your family? Then be sure to get in touch with us, or take a look at the website of the Financial Well-Being Academy for more information and explanation. We will be very happy to help you get started.