Saving money and having a buffer for unforeseen expenses provides tremendous security and tranquility in your everyday life. Still, many are living on the margins.
There can be many reasons for saving money. Sometimes it is for later consumption like a car, TV, computer, lawn mower or holiday. It may also be that you save for a bet to be able to buy an apartment or a house. We save to create more freedom in our everyday lives by giving our cash machine a cash flow that completely or partly replaces our normal wage income.
However, the first saving is that everyone should start with a buffer saving. A saving that enables you to handle unforeseen events. The car may need to be repaired, something is broken on the house or you become unemployed for a period of time. A buffer allows you to handle such situations without a financial crisis. If there is a financial crisis that the car breaks down, you will be guaranteed to feel pretty bad about it.
Examination of Good Finance
I have seen a lot of different studies about how we Swedes can handle unforeseen expenses. Usually it is not so cheerful reading. Below is the result of a survey conducted by Good Finance last spring.
- More than 1 in 10 have difficulty coping with an unforeseen expense of USD 5,000
- 1 in 4 has a difficult time managing an unforeseen expense of USD 15,000
- 1 in 3 has difficulty coping with an unforeseen expense of USD 30,000
The figures that the survey shows are very interesting. 25% of Sweden’s population have difficulty coping with an unforeseen expense of USD 15,000. It must be a huge worry and stress for these people to know that they will not do well financially if something happens. If they end up in such a situation, they will probably need to take out a loan that may worsen their financial situation. It is something I wish everyone would relax.
How big a buffer should you have?
Most banks and common recommendations say you should have 1-2 monthly salaries in the buffer. Some politicians should have said that they should have an annual salary at the bank in buffer. The truth, I think, is closer to 1-2 monthly salaries but also depends on your situation. Do you have a car? Then it might be good to have some buffer if it breaks. If you have a house that requires maintenance and where you are responsible for something happening, a little extra buffer is also needed here. Do you have children also increases the need because you become more vulnerable if you become unemployed for example. If you live alone in an apartment, without a car you probably do not need that much buffer. I think you are beginning to understand.
Then it may be that you are in the union and have an income insurance, it is also in a way a kind of buffer that protects you against salary loss if you become unemployed. Or you have new car insurance which means that there is no risk that you will have to pay anything extra. You have to weigh in on what your situation looks like and then think about how much that feels good for you to have in the buffer.
We who live in houses, have a car and no children have about USD 70,000 in buffer that can help us if something happens to our house or car or something completely unforeseen.
Invest their buffer
The most common tip is to have your buffer in a bank account. The reason is that you may need the money in the short term and you need to be able to access it quickly. Therefore, it is ill-suited to invest the buffer in equities and funds. We have our buffer invested in a fixed income fund on an ordinary share and mutual fund. Thus, not on an ISK with a standard tax as it does not pay off due to the low return on the fixed income fund. Should we need to access the money quickly, we can sell the money in the fund and get it out in a few days so I think it is a little better than a bank account.
I have also previously been in the discussion to invest their buffer at a P2P institute where they have a secondary market. This way you can get a little more return, between 4-6%, on your buffer, while also being able to sell quickly if you need the money. I wrote about it in my post about Lendify for you who want to look into it a bit more.
Money is security
I can hardly imagine what it would be like not being able to handle an unforeseen expense of say USD 15,000. It would probably create tremendous stress and worry. A buffer is something that everyone should have.
When it comes to having a buffer you will feel more calm and safe in your everyday life when you have one. You can be sure that if something happens you will be able to do it. In addition to having an easily accessible buffer, you also have some savings on the stock exchange so your security increases.
At least this is my experience. Although it would take to sell something out of our money machine in order to cope with everyday life, there is the possibility if it should really crisis. I think it psychologically gives strength and confidence to know about it. Although hopefully we will never have to sell anything from the money machine to cope with everyday life, it creates a great calm and a nice security for me and my wife.
Our security that we have from our buffer and our money machine has meant that we dared to leave and dared to resign, for example. Without having the money in our backs, we would not have been as confident in our decisions as we have been.