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Build emergency savings

You may be able to meet your needs and expenses each month, but how would you cope with an emergency or unexpected cost?

What if your car breaks down, you lose your job, or face an unexpected bill?

Putting money aside for emergency or unexpected costs isn’t easy, and it’s a challenge for people in many countries. If you're one of them, then an emergency or unexpected cost can tip you into financial hardship.

Being prepared for the unexpected, rather than dealing with it only when it arises, is key to your financial wellbeing. Estimates vary throughout the world, but experts recommend building up enough savings to cover at least 3-6 months of essential outgoings, in case of emergency.

Here are 5 tips for building an emergency savings fund:

  1. Set savings goals. Setting goals helps you to track your progress and measure your success. It's always a good idea to have an emergency savings fund, in case your situation changes. Anything else you want to save for (like a holiday) should be on top of this.
  2. Consider discussing your savings goals with your loved ones. Explain what they're for and why they'reimportant. Sharing a savings goal with those around you can help you to stay on track.
  3. Keep your emergency funds separate from the money you use for everyday spending, or to pay your bills. This can remove the temptation to spend it. Setting up a separate savings account can usually be done quickly online.
  4. Try to save regularly and automatically. Rather than try to save what you have left at the end of the month, set up an automated transfer from your regular bank account to a savings account on the day you are paid.
  5. If you can’t save a lot, it can be hard to get motivated to save at all. But saving any amount (however small) is helpful, and can build up a valuable emergency savings fund over time.

Save for the future

The feeling that you're not putting enough money aside for when you retire, or that you don’t have enough saved to cover unplanned expenses, can be uncomfortable. But there is good news - learning about healthy financial habits and practising your financial skills (like you’re doing now!) can increase your financial confidence and have a positive effect on your financial wellbeing.

It's hard to estimate how much money you might need for your retirement. A good way to begin planning for life after work is to assume you'll need between half and two-thirds of your salary, after tax is deducted, to maintain your current lifestyle.

Retirement income example

You can estimate your retirement needs very roughly using a few simple steps. Let’s suppose you plan to retire at 65. You are fit and healthy. Several members of your family lived into their nineties, so you might need an income for as many as 30 years. Your retirement goal is:

(INCOME AFTER TAX x 2/3) = (INCOME AFTER TAX x 30 years) = SAVINGS GOAL

[Current salary after tax x 0.66 x Number of years = Savings goal]

(Remember that you can subtract the income from at least one state or government-sponsored retirement income over the same period.)

Your state or government-sponsored retirement fund is unlikely to cover what you need in your retirement. The earlier you start saving, the larger your retirement goal will be. That’s because the longer you save, the more the interest you earn compounds, which is when you earn interest not only on your savings but also on the accumulated interest you’ve already earned. This interest on your interest is called compound interest.

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