Before you start investing, you need to ask yourself one important question: do I have enough savings? That is the amount that is always on a separate account and is ready to help in unexpected circumstances.
No matter what you call this amount, a backup fund or rainy-day savings, it is one of the primary goals in personal financial planning, which is worth paying attention to.
Why do You Need Rainy Day Savings?
Savings will help you with the following goals:
- Cope with unexpected expenses
- Cover expenses in case of loss of the source of income.
Without savings, you can get into an unpleasant situation when you have to borrow money from parents, friends or acquaintances, take a loan with a high-interest rate, or rely on government benefits and compensation.
If you start investing without sufficient savings, you may end up with the fact that, under an unpleasant set of circumstances, you will have to sell your investments, and this may not be the most inopportune moment: when their value has already fallen, for example, due to the crisis.
An even more deplorable situation will happen if the investments are unsuccessful and without savings, there will be a strong blow to the financial condition. In this case, savings play the role of a reserve fund. When there are sufficient savings, then you can make bolder decisions, manage personal finances and start investing.
How Big Should Financial Savings Be?
It is difficult to predict how much money may be needed to cover unforeseen expenses at one time. It is safe to predict that after a certain number of years, savings will have to be used to repair a car, household appliances or a house if there is no specially created repair fund for this.
One scenario that can also happen is the reduction or loss of the source of income. For example, when, due to a long illness, you cannot actively make money, or if the employer does not pay wages during a crisis, or due to a reduction in the income of one or more family members, if you lose the main customers.
To alleviate such unforeseen problems, it is recommended to have savings in the number of expenses, ranging from 3 to 9 or even 12 months. The exact amount depends both on the specific person and the family situation, as well as subjective feelings, how much money a person needs to have in the account to sleep peacefully at night and be able to invest.
The less the feeling of financial security, and the more expenses, obligations and the number of people in the family, the more savings you need to have.
To determine how much your savings should be, consider the following questions:
How many months will it take to find a new source of income if you are unemployed?
The answer to this question may depend on the field of activity, place of residence and specific knowledge, skills, and experience of the person. As an alternative option, residents of Nigeria and plenty of other countries can consider Forex trading as a new source of income. Go to the Forextimebroker site by the link https://www.forextime.com/ and find out more about the possibilities that are available for you.
Is it possible to count on the help of parents, or will you have to help them too?
When you are young, you can rely more on support from your parents. But when you get older, it would be nice to talk to them one day and make sure that they have sufficient savings and are saving for their retirement. If necessary, you will have to start taking into account the support of parents for personal financial purposes.
How Quickly Can You Accumulate Savings?
The math here is very simple: the larger the percentage of income you set aside every month, the faster you will manage to accumulate the necessary amount.
For example, if the percentage of savings is 10%, that is, 90% goes to expenses and 10% to savings, then it will take 9 months (= 90% / 10%) to accumulate an amount equal to one month of expenses.
The formula is: Number of months it will take to accumulate the amount of one month of expenses = (1 – Monthly Savings %) / Monthly Savings %. The lower the percentage of savings, the more you have to save.
How many months will it take to save?
If you set aside only 5% every month, then even the accumulation of an amount equal to one month of expenses will take 19 months, that is, more than a year and a half. Therefore, there is no other solution here, how to increase the percentage of monthly savings by increasing income and/or reducing expenses.
To maintain focus and motivation for the time it takes to create significant savings, it is worth setting yourself a goal of creating a financial cushion in the amount of one month of expenses. And only after achieving this goal, set yourself a higher goal.
It is the ratio of expenses to the amount free from expenses that determines the speed with which you can begin to create savings and an investment portfolio.