Everyone hears it daily: save your money for a rainy day, save for emergencies, save, save, save. But the question is, why do we need to save? Let's answer that question with another question. Do you want to lie awake at night worrying about how you will pay for your children's education, how long you will be able to pay the bills if you are unemployed, or even how you will pay for that roof replacement?

It's about peace of mind and financial freedom. Not having to worry about how you will pay for things.

A recent study reveals that about 25% of people have no savings, while 39% have less than a month saved up. That's 64% that will be in major financial trouble if they are unemployed. Saving even a little every month is a start to building a good saving habit and gives you peace of mind in an emergency requiring a sudden cash outlay.

Saving habits can be inherited from our parents through their habit transference. Their habits become our habits; unfortunately, they are habits of bad saving and instant gratification.

 

What do we need rainy day savings for?

There are various scenarios where emergency savings would come in handy.

• Major car repairs 

Your insurance usually does not cover wear and tear on your vehicle. A major repair, such as a gearbox change, could set you back thousands. Will you have the disposable income to pay for it, or will you have to take out credit at a high-interest rate?

• Unemployment

Losing financial independence is one of the worst-case scenarios for any individual to find themselves in. Will you be able to survive and pay your bills if you find yourself unemployed? How long will your savings last? Unemployment at the start of 2023 was 6.7% in the EU, 3.4% in the US, 3.8% in the UK, 3.6% in Australia, 8.62% in Chile, 11.4% in Colombia, 29.95% in South Africa, 20.81% in Botswana, 5.3% in China, India at 7.8%, and a global average of 4.8%.

• Major health expenses

Health insurance might not cover all medical conditions. What happens if you cannot work for several months due to illness or become disabled and need extensive treatment?

• Major house repairs

Nobody wishes ill on anyone, but what would happen if floods damaged your home or a roof needed replacing? Insurance doesn't always cover acts of nature or age. Again, taking out high-interest rate credit to cover these expenses.

• Emergency travel

There might be a time when you would need to travel abroad or take your family for a family funeral or emergency. 

• Any unforeseen urgent situation

Any other urgent situation that may arise or be considered unforeseen. No one knows the future, so it is best to show foresight and be prepared so you can handle financial difficulties.

 

Excuses for not saving

Times are tough, and saving is getting more and more difficult. Common excuses (we call them excuses because it is an easy way out not to save) are:

• Rise in cost of living – Times are tough, and inflation is at an all-time high. Disposable income is diminishing.
• Unforeseen monthly expenses – There is always some expense that pops up every month, like a fee for a school activity, an unexpected birthday present purchase, or a sudden medical cost.
• Supporting elderly parents and children – This is a genuine reason, as looking after three generations can seriously drain your finances.

Saving has always been a challenge for most. There always seems to be some unforeseen monthly expense, and it's easy to get demotivated. But, discipline is needed to save and commit to it monthly. Even a small amount monthly is a start and may require a little belt-tightening, like fewer coffees every morning from the corner coffee shop or less online shopping. 

 

How do successful savers manage it? 

We take a page from the successful savers' book on how they do it. They are motivated to be financially independent and keep their eye on the end target. They form good savings habits to make it easier. A regular routine helps.

• They don't lose sight of the end goal – It's easy to get distracted by unforeseen expenses, impulse purchases, and easy credit. Stay focused and remember what you are saving for.
• No time like the present – they save now with no excuses to delay. Even starting small and gradually building up is more efficient than waiting until you have enough to save big.
• Needs vs Wants – they know the difference between needs and wants. Our impulse buys are often Wants and not Needs, e.g. going to the mall and seeing a sale is on and going crazy with the spending.
• Budget – they create a budget and stick to it. Impulse buys are added to the budget to avoid a shopping binge.
• More cash, less credit – Research shows that people can spend more money with credit cards versus paying with cash. Remember the high-interest rates that credit cards charge. Statistics show that the average cash transaction is $22, whereas the average non-cash transaction is $112.
• Pay themselves first – this means savings and retirement savings are allocated first via debit order before any other expenses. They pay themselves first and then distribute whatever is left into the budget. This way, they are financially independent. A monthly debit order ensures that funds are transferred into the savings account.
• Keep track of little spending – The little everyday expenditures add up to a large amount. Watch those little card swipes for coffee, a sandwich, or small items.
• Adapt to life – your lifestyle changes over time, and so should your spending. You cannot spend the same if you lose your job or earn a smaller salary. Your lifestyle must adapt to your income.

Above all else, good savers learn to live below their means. This means spending less than they earn, having spare money available for emergencies and being financially independent. Open a new, separate bank account for your savings goals; this will limit access, and you won't be tempted to use it. Some accounts even offer a decent interest rate to help your money grow further.

A rainy-day fund gives you peace of mind and financial security, so you don't have to worry about future emergency expenses or be left with taking out credit.

Your financial advisor can help set up an achievable savings plan. 

 

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your deVere advisor for a personal consultation.

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.