Avoiding the savings gap

There’s a funny thing about money. No matter how much you have coming in, you will always find a way to spend it.

So, we may get the largest mortgage we can afford, push ourselves to buy the high end car we feel we must have and push ourselves some more to afford a special holiday. If we have more coming in, it is not long before we have more going out, whether it is a second home or children at private school.

Everything feels like a necessity. But do you have anything saved to deal with an emergency?

At Continuum we are looking at the savings gap.

What is the savings gap?

As Covid so dramatically demonstrated, none of us knows what is around the corner. Illness, accident, financial downturn – they could all derail our financial routine. Some cash savings are vital to prepare for emergencies. Ask yourself – if your income suddenly stopped coming in, how would you manage. The mortgage, the car, utilities. The bills for them would still be coming in even if your income suddenly wasn’t.

In practice, many households couldn’t last a single month on their savings and the problem can actually seem to get worse the higher the income they have come to depend on.

In reality the right level of savings you’ll need to cover an emergency is more like between three and six months’ worth of essential expenses. If you’re retired, you’ll need more like one to three years.

The savings gap is the difference between the easily accessible cash you can call on in an emergency and the usually very much larger amount you will actually need. Higher earning tends to lead to a bigger gap.

The more you have coming in, the more you will spend. So the higher your earnings and the more expensive your lifestyle the more savings you will need to tide you over. In other words, the more you earn, the wider your savings gap will be.

How much do you really need?

How much you really need will depend on many factors. The first step is to work out which expenses are essential. Keeping a roof over your head and food on the table are the obvious priorities, but what about all your other commitments. The car (or cars) the bills, all the other regular payments you have to keep up.

This will give you an idea of what you need to cover every month.

Then work out how many months you might need to cover. Could you manage with three months cover, or would you feel more comfortable with six? If you found yourself without work, how long would it take to find a new job. What about health, and the health of those you’re responsible for?

If you have higher earnings and outgoings and are at reasonably high risk, you’ll probably find yourself needing more cash savings than you currently have.

And what will you do if the cash runs out?

What can you do?

To bridge the savings gap you need to establish a financial safety net as quickly as possible. There are several strands to make up an effective net.

The first is cash – the cash lump sum you need to bridge a gap of three to six months.

If you have the assets available as investments rather than cash, you risk having to liquidate your portfolio at the wrong time. Having to cash in when the market’s dipped could mean selling at a loss

You might be wary of holding a large amount in cash, especially at a time when interest rates are so low. The best solution may be to arrange a solution that provides the best of both.

This could mean keeping some cash – perhaps enough for a month or two – in an easy-access account, with the remainder of your emergency fund in low-risk investments which can be cashed in relatively quickly for ease of access.

You should also provide the other vital strand of your financial safety net – insurance which would provide cover in case of accident, illness or unemployment that meant you were unable to work.

Getting help to bridge the savings gap

The simple way to get the help you need is to call us and get our experts working with you.

We can provide a strategy for building your emergency fund and ensuring that it can still earn the best possible interest rate. We will look at the income protection products you should have.

After that they will look at your longer term needs and ensure that the savings gap should never be a problem for you, by providing a detailed route map for all your financial affairs

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The Financial Conduct Authority does not regulate deposit accounts.

Your home maybe repossessed if you do not keep up repayments on your mortgage.

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