How to create a financial safety net - and where to store it

In this article I will talk about the financial airbag (FPB). This personal emergency fund is a critical element of your financial stability. Read on to learn how to create it and place it correctly.

What is a financial reserve? No FPB? This is a risk... How to calculate the size of liquid reserve Financial reserve: how to create it and in what currency to store it? How to store an airbag that everyone should have a long time ago. What to do if you have debts? Why financial security is not only money Family financial cushion: 3 most important rules TOP 3 elements of your financial stability

What is a financial cushion

A financial airbag is the savings of an individual or family that can be used as quickly as possible. But these are not necessarily paper bills. The main thing is that the reserve contains the most liquid assets that can be quickly converted into cash - withdrawn, exchanged, withdrawn, converted, resold.

The peculiarity of a financial cushion is that it cannot be simply spent on everyday expenses or desires. The reserve is formed only for emergency purposes. Such a financial buffer helps to get through difficult periods of lack of money with minimal losses for each family member or individual.

They create a financial reserve from their own profits. Savings are collected by families or individuals who understand the significance of the final goal. Financial cushions are formed not only by households, but also by countries, businesses, and entrepreneurs. Reserves are needed for periods of financial instability, crisis or force majeure.

Having a financial cushion instills peace of mind in difficult periods of life and allows you to focus not on the emergency search for money, but on solving other problems. If one of the family members loses his job, he will not jump at any offer of income just to cover the immediate needs of the family. He will be able to continue searching for the vacancy that better suits his professional skills and abilities. At the same time, there is no fussiness or stress, and the usual way of life of the family is preserved.

Option 4: shares

It is not suitable for everyone, as it requires special knowledge. In addition, you will have to take into account a number of nuances:

• Shares are subject to high volatility, i.e. large fluctuations in price;
• The risks of investing in stocks are high;
• Low liquidity of shares of not the largest companies.

Shares can also be used to create an airbag, but with reservations. First of all, due to the high risks, you will need to create a diversified portfolio. Ideally, create a portfolio of several strong, promising companies in each market sector. My approach to analyzing companies before buying shares is outlined in detail in the Lazy Investor Course.

How is it different from investing?

A financial cushion, in fact, is created not to increase money, but to solve temporary financial difficulties. For example, in case of dismissal, illness, sudden life circumstances of a personal or general nature - natural disaster, quarantine, emergency.

The main goal of investment is to increase savings or create a source of passive income. Stocks, bonds, investment accounts, and other financial instruments are suitable for this. Each investor chooses for himself where and in what volume to direct the accumulated money, as well as the investment period and the degree of risk.

Not everyone can mix a financial cushion and investments. But part of the money set aside in the reserve can still be invested under certain conditions, which we will discuss in more detail in this review.

Why is it needed?

When you mention “airbag,” one of the first associations is the airbag in a car, which is designed to soften the impact of the driver and passengers in a car accident. A “cash cushion” will also save you from a possible crisis, dismissal and any “accident” in life.

Having an untouchable financial reserve, you will even psychologically feel more protected and confident, and you will not be unsettled by a sudden car breakdown or flooding of your neighbors.

Why financial reserves should not be stored in securities

It is undesirable to place all funds from the financial cushion into investment instruments for three reasons:

1. If money is invested in securities or other financial assets for a certain period, it may be very difficult to withdraw it on demand. In addition, high-risk instruments can not only rise in price, but also fall in price, and this is a very bad strategy for a financial cushion. That is, at the end of the investment the investor will have less money than he had at the beginning.
2. If you urgently sell securities such as stocks or stock ETFs, they may cost less than at the time of purchase, and there will be no time to wait for the price to rise. In this case, the reserve will go to a loss. At the same time, the value of bonds falls less, so part of the cushion can still be directed, for example, to OFZs.
3. A separate argument is that exchanges do not work on weekends or at night, so you won’t be able to get money very quickly. Plus, transactions with securities take place with a delay of 2-3 days, which must also be taken into account when withdrawing funds.

But all these disadvantages are relative. If you draw up a strategy correctly, then part of the family reserve can be placed without compromising the amount of savings.

Where can I get money?

There are two main options: earn more or spend less.

It's best to use both. Think about creating additional income, our article “20 ways to find extra money” will help you with this. We will also help you learn how to save: read a short guide to smart savings.

In what form should it be stored?

There are several ways to store a financial reserve:

• cash;
• on a debit card;
• on a bank deposit.

Cash

The most obvious advantage of cash is free access to such savings. But there are many more disadvantages:

• inflation, which gradually depreciates savings;
• the risk of spending money for other purposes;
• loss or theft.

If you keep your savings in a bank safe deposit box, you will have to pay for it. In addition, not all banks provide 24/7 access to safe deposit boxes. Therefore, when storing cash for emergencies, you should consider a home safe.

On a debit card

You can withdraw money from a bank card even at night, the main thing is to find an ATM of your servicing bank or partner. To reduce the impact of inflation, it is better to choose a card with interest on the account balance. The main disadvantages of storing a financial cushion on a debit card:

• you will most likely have to pay for issuing the card and its maintenance;
• Internet banking, SMS alerts and other services may also be paid, but most additional services can be refused and thus reduce costs;
• The bank can change the interest rate at any time.

An additional precaution is not to use a card with a large balance for purchases and payments, so as not to compromise access to the money in the account and not to lose the plastic card.

Please note that most banks offer the best savings offers if the minimum transaction limit is met. For example, settlements were carried out for 10-50 thousand rubles per month. But not all clients are able to comply with such requirements. Therefore, review the bank conditions in advance for similar offers with interest accrued on the balance.

When storing a financial cushion on a debit card, you should track the amount of savings. Funds up to 1.4 million rubles in one bank are legally protected; anything above this amount can be lost in the event of bankruptcy of a credit institution.

On a bank deposit

When choosing a bank deposit program, you need to select deposits that allow partial early withdrawal with minimal losses of accumulated interest. The main advantages of keeping a family reserve on a bank deposit:

• interest on the deposit reduces the impact of inflation;
• the money will not be stolen and it will not be lost;
• The interest rate remains unchanged for the entire term of the deposit.

Of the minuses:

• it is difficult to calculate how much money may be needed urgently; if you have to withdraw the entire deposit, the accumulated interest will be minimal;
• Branch opening hours may be inconvenient; not all banks allow deposits to be processed remotely or on weekends, which reduces the mobility of deposits.

The limit on the amount, as for debit cards, is a maximum of 1.4 million rubles in one bank. It is better to keep savings above this limit in another bank or another asset. The financial cushion can be divided into several areas or used only one.

Option 1: cash rubles

Keeping cash “under the mattress” is a popular tradition among Russians, which has many advantages:

• Money is always at hand;
• You know exactly what amount is available at any time;
• Cash is a universal means of payment.

In unstable Russian conditions, it is very important not to depend on possible surprises from government leadership and the risks of losing a bank deposit.

Unfortunately, there are downsides here too:

• Money is subject to inflation;
• The apartment may be robbed;
• There is no guarantee that cash flow will not be limited tomorrow.

Of course, a certain reserve of cash is required. But as they say, you can't keep all your eggs in one basket.

I also recommend reading:

Which banks operate in Crimea and how to open a brokerage account there

What banks and brokers operate in Crimea

In what currency should I store it?

If the financial cushion is already impressive, then it is advisable to store part of the amount in different currencies. Sometimes for this purpose they use a package of freely convertible most common currencies - American dollars, euros. And sometimes they add the most stable currencies in the world - Swiss francs, Japanese yen, Norwegian and Swedish kroner.

At the initial stage, it may not be practical to convert Russian rubles to other currencies. Significant sums can be spent on conversion, especially if you buy foreign currency at a time that is not the most favorable for the Russian ruble.

The most common distribution for Russians:

You can choose any of the proposed options or develop your own proportion. You can also add any other currency that inspires more confidence than euros, rubles or dollars. But you shouldn’t keep your financial cushion in some exotic currencies. Remember: the main task of a reserve is its ability to quickly turn into cash that will go to the needs of the family.

Option 7: gold

Another popular misconception: holding money in gold is always profitable. But even exchange prices for bank bullion are subject to sharp fluctuations.

The most interesting use case for drag. metal as a safety net is the purchase of investment gold coins. A very specific tool, I recommend reading my article.

How to determine the size of the financial reserve

The size of the financial cushion depends on whether there are children in the family, as well as other dependents or not. The more family members and dependents, the longer the reserve is needed:

1. For single people or families without children, the supply is formed for 4-6 months.
2. For families with children or dependents - for a period of 8 to 12 months.

Mandatory expenses include utilities, rent, loans, purchases of food, household items, seasonal clothing, shoes, as well as other expenses that cannot be avoided. To calculate the amount of monthly expenses, it is advisable to conduct a preliminary analysis and see how much is enough to provide for all family members, and add 10-20% to it.

For example, the income of a family with children is 200 thousand rubles per month, and expenses are 120 thousand. This means that for 12 months a financial reserve in the amount of 1.440 million rubles will be needed. Taking into account the additional reserve, the amount of 1.5 million rubles is enough to provide for a family for a year. But only if costs do not change significantly.

Recommendations on the size of the financial cushion are conditional. Some families prefer to reserve amounts for 2-5 years of residence, so as not to worry if a protracted crisis or unforeseen circumstances occurs.

What determines the storage method?

Recommendations for storing the financial cushion and its distribution depend on the size of the emergency reserve. The larger it is, the more options for maneuver. At the initial stage of accumulation, the strategy should be as simple and understandable as possible.

Strategy for a small stock

If the reserve is small or the family is at the very beginning of accumulating a financial cushion, it is most convenient to store the reserve in cash or on a savings card. Some people are better suited to saving money through savings accounts. In this case, you can arrange deposits using a “ladder” scheme - open several accounts for different periods of 3-6-9 months.

For example, 150 thousand rubles have been collected, divide them into three deposits of 50 thousand each. After three months, when the first deposit expires, report it to the 9-month deposit or make another deposit for the 12th month. That is, every 3 months access to one of the amounts is opened. This strategy helps minimize inflation and maintains access to a certain portion of money.

If a depositor urgently needs a certain part of the reserve, then funds can be withdrawn not from all deposits at the same time, but only from the one with the closest completion period. In this case, you should check with the bank in advance whether it is possible to terminate the deposit online. It is also advisable to apply for a deposit card at the same bank. Then the most convenient and quick access to money is maintained. For example, if you can close a deposit via online banking, then you can withdraw money and withdraw it from your account at an ATM even on weekends or at night.

This strategy solves three problems simultaneously:

• money is not stored directly on the card, which protects it from theft and withdrawal if the card is lost or the PIN code is compromised;
• the deposit has an interest rate that at least slightly compensates for the depreciation of money under the influence of inflation;
• the threat of losing accumulated interest insures the money in the deposit against a momentary desire to take and spend the amount for other purposes.

When the first stage of accumulation has been completed and the financial cushion has become larger, you can move on to another strategy or continue using this one. Each person decides for himself which path to follow.

Strategy for a large reserve

When the formed reserve of the family budget has reached the minimum required reserve, then the entire amount in excess of the calculated limit can be directed to investment. But you can only invest in risk-free assets. That is, for the family from the example described above, for which 1.5 million rubles is enough for a year, anything more than this amount can be invested in short- or medium-term financial instruments.

Find out where to invest money to receive monthly income from this article by Brobank. In another review, explore the 5 best ways to grow your savings.

Those who decide to invest separately from their financial cushion will only need to track the safety of the deferred reserve. Anything larger than the emergency reserve should work and bring the highest possible profit, while risk-free instruments have minimal profitability. Therefore, it is not necessary to store all the family’s free money in a financial cushion.

When to start collecting and how much to save

Forming a reserve cushion for the family budget is the first stage of financial planning. Therefore, you can start saving as soon as the thought of it arises or income appears.

Financially literate parents try to develop the skill of smart saving in their children, but those who do not have such a habit will need to develop it. Read about how to start saving and saving money in a separate material from Brobank.

Even with a small but regular salary, you can look for ways to optimize expenses. You can start saving with 10% of your income. Most families do not notice a significant difference between living on 100% or 90% of income, provided that all expenses are optimized. But this way is not very effective. To accumulate a reserve of 1 month, you will have to save 10 months; to form a cushion for one year, it will take 10 years. Therefore, if 10% per month seems not enough, then all additional income can be sent to the reserve:

• bonuses;
• bonuses;
• 13th salary;
• income from part-time work;
• rental of housing, car or other property;
• any other income not related to wages.

But for those who find it difficult to allocate even 10% of their salary, you can start with 5%. Gradually, you will develop the habit of “seeing” the holes where money goes ineffectively.

You shouldn’t wait for Monday, next month, the new year or a salary increase - it’s smarter to start right away. If income from the employer comes to the card, you can set up an automatic debit of the amount, which will go to a special account as soon as the salary is credited.

What can you use it for?

The financial cushion is used in two global directions:

1. Emergency need for money. This is the first and main purpose for which a cash reserve is formed. Layoff at work, burst pipes, fire, accident, illness and many other situations can lead to the spending of cash reserves. If you have your own business, family and children, then there will be even more such situations; it is impossible to foresee each one, but you can and should insure yourself with a reserve.
2. Sudden investment opportunities . The most profitable offers for investors open up during sharp or protracted crises. Not all owners of a financial cushion will be able to competently assess the risks and prospects of an investment. But if you already have some investment experience, then at this time you can buy assets at the most attractive prices.

The second option is not suitable for everyone. You can only allocate a certain share of the total savings to it, so as not to be left with nothing.

If force majeure occurred and the family had to climb into the financial cushion, then after the situation has stabilized it should be systematically replenished. The main thing to understand is that an emergency is not a vacation, not a new car or a fur coat on sale, but those circumstances that significantly affect the family’s ability to earn money.

In some cases, when there are current debts - for example, a loan or mortgage, families believe that it is better to pay them off quickly than to save for a rainy day, but this is not entirely true. Yes, from an economic point of view, it is more profitable to close loans as quickly as possible, because the interest on debt servicing is higher than the income from risk-free savings. But the purpose of a family’s cash reserve is not short-term profit, but global financial security in times of emergency.

If the borrower is laid off from work without the accumulated reserve, he may become bankrupt. And with a cash reserve, he will be able to fulfill his obligations to the bank for a certain period and at the same time look for a job in his field.

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about the author

Klavdiya Treskova - higher education with qualification “Economist”, with specializations “Economics and Management” and “Computer Technologies” at PSU. She worked in a bank in positions from operator to acting. Head of the Department for servicing private and corporate clients. Every year she successfully passed certifications, education and training in banking services. Total work experience in the bank is more than 15 years. [email protected]

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Author of the article: Klavdiya Treskova

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