Prepare for the unexpected with a savings buffer
May 4, 2022
A study by the Economic and Social Research Institute (ESRI) found that 6 in 10 people face unexpected expenses each year. The CCPC has partnered with the ESRI to carry out research into how encouraging short-term saving habits among Irish consumers can increase their financial resilience against unexpected financial shocks by building up a savings buffer.
Building up a savings buffer for when things go wrong can help reduce the stress of that situation and will help you avoid borrowing when unexpected expenses arise. To help get you started, we have some steps that you can take to begin building your buffer.
What is a savings buffer?
A savings buffer is money that you have set aside to deal with unexpected expenses that may arise. These savings are separate to other savings goals you may have such as saving for a car or holiday. Having a savings buffer allows you to manage expenses that arise without the need to dip into other savings or having to borrow the money.
Set a realistic savings target
The first step to building your buffer is to set a savings target. It is important that this target is realistic and achievable. If you set an unrealistic target for yourself you may become discouraged if you are unable to meet it.
A general rule of thumb is to have three to six months’ salary put by as a buffer, though for some people this amount may take a long time to accumulate. Calculating how much money you may need if certain expenses arose such as the car breaking down, something in the house needing repair etc. can be another starting point.
Work out how much you can save
The second step is to work out how much you can comfortably save each week, fortnight or month, depending on when you are paid. Only saving what you can and not trying to save too much will help you avoid dipping back into your savings or even borrowing for everyday expenses.
If you have never made a budget before, our handy budget planner will help you get started. Once you have worked out how much you want to save towards your savings buffer you can work out how long it will take you to reach your target.
Decide when to start saving
Now that you have worked out how long it will take you to reach your target, the third step is to decide when you want to start saving. The CCPC’s 2018 Financial Capability and Well-being study showed that active saving is one of the key behaviours in improving your financial wellbeing, so begin saving as soon as you can, for example your next pay day or the one after. Setting up a standing order so that the money goes into your savings account automatically each time you get paid may help.
Decide when you can and cannot withdraw
Once you are all set up to begin saving, the final step is to commit to only withdrawing from your savings to meet unexpected expenses and not for discretionary expenses such as nights out, new clothes etc. It might be helpful to write down a list of the reasons that you may need to use your savings buffer and reasons why you may be tempted to withdraw.
Many people will keep their savings buffer in an instant access account. If you feel that you will be too tempted to withdraw for everyday expenses you might want to keep the money in a notice deposit account. It is important to note that if you have your money in a notice deposit account you will have to give notice to withdraw the money, typically 7-30 days depending on the account.Return to News