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FINANCIALLY AESTHETIC · GUIDE 05/37
BUILD YOUR SAVING SYSTEM: SAVING RATE, PAY YOURSELF FIRST
FA-1.5 · The Money Operating System
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START HERE
Saving works better as a system than as whatever happens to be left at month-end.
How Much Should You Save?
It depends on many factors.
The first step is to create a budget. This is an overview of all your income and expenses.
- Your income, such as your salary as an employee or civil servant, income from self-employment, replacement income, child support, interest on your savings, rental income, etc.
- Your monthly expenses, such as repayments on your loan, rent, gas, water, electricity, internet, groceries, streaming subscriptions, clothing, transportation fees, leisure activities, etc.
- Your annual expenditures, such as insurance, taxes, vacations, dues, etc.
- Planned one-time expenses such as a party, home renovations, a new car, etc.
Comparing your income and expenses shows you how much money you have (or don’t have) available to save. Or, at the very least, it will give you an overview of the expenses that are straining your budget and where you might be able to cut back.
Savings are the portion of income that isn’t spent. They represent the difference between income and expenses. They are primarily used to:
- to finance short- or medium-term projects (such as funding your children’s education or a real estate purchase)
- to build up a long-term source of supplemental income (to supplement your retirement, for example)
- to cope with unexpected events: this is known as emergency savings
Tips
- Saving is important. It provides peace of mind. Try to save from time to time, even small amounts, and even if you do so irregularly.
- Determine your ideal savings buffer and set it as a target.
- Creating a budget can help you figure out how much you can save.
Pay Yourself First
Start by saving a portion of each paycheck if you can. The earlier you start saving, the longer your money will earn interest.
To build emergency savings, it’s advisable to set aside a portion of your monthly income each month. To do this, start by creating a budget that takes into account all your income and expenses. If your expenses exceed your income, you’ll need to rebalance your budget. If the opposite is true, the difference is the amount you can save.
Saving for retirement can be difficult if you have other financial obligations, such as a mortgage or rent, car payments, or student loans. Create a budget to help you determine how much money you can save.
Automate Your Savings
Automatic deposits can be a good way to save. Contact your financial institution to set up automatic transfers of a portion of your salary to a savings account. Consider increasing the amount of your automatic deposits as your salary rises. Adding a small amount regularly can make a big difference on a long-term basis.
Choose the savings amount, the date, and how often you want to save. Then set up an automatic transfer from your checking account to your savings account.
You can schedule the automatic transfer for payday. That way, the savings amount will be transferred as soon as your paycheck is deposited into your account.
Make It a Habit
Make savings a part of your daily routine.
Try these tips:
- Put your loose change in a jar when you get home
- Set up a savings reminder on your smartphone or computer
- circle your savings dates on a calendar in advance
- Stick notes on your desk, mirror, or fridge to remind yourself to save
Cut an expense to save money
Cut expenses from your budget and add those amounts to your emergency fund. Your current budget won’t be affected, and your emergency fund will grow faster.
Consider the difference between your needs and your wants to determine which expenses you can eliminate.
- Need: a necessity, an obligation, something essential
- Want: a wish, a desire, something that isn’t essential
To cut out unnecessary expenses:
- Bring your lunch to work instead of buying one
- Make your coffee at home and bring it with you to work
- use public transportation instead of your car
- Cut one non-essential item from your grocery list
- Use coupons, cash back offers, and take advantage of sales
Depending on your current lifestyle, you could save several dollars every day!
Build Your Savings Over Time
Take advantage of every opportunity to boost your emergency fund. Deposit extra money into your savings account whenever possible.
For example, you might have extra money when:
- you receive a tax refund
- you get a wage increase
- you sell something (such as a car, jewelry, or furniture)
- you receive money as a gift
- you receive a cash bonus for labour
When you’ve finished paying off any type of loan, this is a great opportunity to boost your emergency fund. Take the amount that was set aside for your monthly payment and deposit it into your savings account.
These payments are already part of your budget, so why not put them to good use?
Start Small, Start Now
It may take you months or even years to save the amount you want for your emergency fund.
It’s better to start with a small amount so you don’t get discouraged.
Start by figuring out how much you can set aside each week. Whether it’s $50, $20, $5, or a few coins, the important thing is to start now.
Table - The Growth of Different Savings Amounts
| Weekly Savings Amount | Total Annual Savings |
| $20 | $1,040 |
| $15 | $780 |
| $10 | $520 |
| $5 | $260 |
The savings amounts in this example are for illustrative purposes only. This example does not include any interest you may earn or potential tax implications.
- At $5 per week, you’ll have $260 after one year
- At $10 per week, you’ll have $520 after one year
- At $15 per week, you’ll have $780 after one year
- At $20 per week, you’ll have $1,040 after one year
Saving a small amount on a regular basis makes a big difference in the long term.
The Importance of an Emergency Fund
An emergency fund is an amount of money you set aside to deal with unexpected events. At some point in your life, you may have to deal with an emergency or an unexpected expense.
Such surprises usually don’t give you time to adjust your budget accordingly.
Here are a few examples:
- car repairs
- an emergency trip to the vet
- job loss
- a health issue that prevents you from working
Don’t confuse unforeseen expenditures with occasional expenses such as school supplies, winter tires, or even holiday expenses. These occasional expenses should already be factored into your budget.
Setting up an emergency fund helps you:
- deal with unexpected events without going into debt
- avoid high-cost loans (such as payday loans or a cash advance on a credit card)
- maintain financial control
- have peace of mind
Emergency savings are funds that are set aside to be used in the event of an unexpected situation requiring immediate expenses. They are also sometimes referred to as a nest egg, a safety net, or a rainy-day fund. An unexpected event might occur as a result of job loss, which leads to a significant drop in income. It could also involve urgent home repairs, medical fees, a car breakdown, or a car accident, etc.
Emergency savings should not be used to pay for regular expenses, such as rent, electricity, groceries, leisure activities, travel, etc. They should be set aside to deal with unforeseen events, which by definition are irregular. Emergency savings are also different from savings set aside for specific projects, for which the amount and timeframe are already planned.
Having emergency savings helps you avoid overdrawing your checking account - which incurs additional bank fees - or even dipping into the savings set aside for specific projects.
What Constitutes a True Emergency?
Before using all or part of your emergency fund, first determine whether you’re actually facing an emergency. Perhaps this expense can wait until you’ve had the chance to save the required amount.
If you’re unsure, go back to your list of needs and wants. An emergency is a major, sudden need that isn’t part of your current budget and wasn’t planned for.
When it comes to an emergency, don’t hesitate to use your emergency fund. The purpose of the emergency fund is to prevent you from having to resort to expensive credit options.
Although your emergency fund should always be easily accessible, don’t be tempted by its balance. Leave it untouched for a real emergency.
How Much Should You Aim For?
Ideally, you should try to save the equivalent of 3 to 6 months of your usual expenses. You can also aim for 3 to 6 months of income. Both methods work, so go with whichever is easier for you.
These amounts may seem hard to reach. That’s why you should save gradually.
At Wikifin, we recommend a reserve of three to six times your net monthly income.
Emergency savings are a personal matter. The amount should reflect your personal and professional situation while also giving you peace of mind.
To estimate how much you think you’ll need, you should first consider your household expenses and your lifestyle in general. The needs of a single person differ from those of a family with children. Similarly, your employment status must be taken into account. For example, being a self-employed worker, a civil servant, on a permanent contract, or a temporary worker involves different income conditions, particularly in terms of regularity and security.
You should also consider the psychological aspect. You may feel the need to have savings that are much larger than your actual material needs. This aspect is difficult to quantify because it is unique to each person and can change based on factors that may or may not be rational.
Although it is difficult to assess individual cases, it is generally accepted that the amount of emergency savings should be equivalent to 2 to 6 months’ worth of income, and more commonly to 3 months.
This amount can also be determined using a different method that counts not in terms of income but in terms of months of essential expenses (rent, insurance, subscriptions, groceries, etc.). This method of calculation offers less protection and may not be suitable for everyone.
You may still find yourself facing unforeseen expenditures or a change in income. Calculate the minimum amount of readily available funds you need. This amount varies from person to person and changes as your personal circumstances evolve.
Where to Invest Your Emergency Fund
It’s important to choose the right type of account to build your emergency fund. The money should be easily and quickly accessible in case of an emergency.
Look for the following features in your savings account:
- Your account is separate from your everyday checking account for transactions
- You pay little to no transaction fees
- You don’t pay any penalties for withdrawals
- You earn interest on your savings
Contact your financial institution to find out about the different account options available to you. Make sure this account will help you reach your goal of building an emergency fund.
Since emergency savings are intended to help you weather a financial setback, they must:
- Be accessible (also referred to as liquid), meaning it can be withdrawn at any time or very quickly;
- Be safe (also referred to as risk-free), meaning it must not lose value through investment in financial products that carry a risk of capital loss;
- Avoid losing value. Since emergency savings aren't meant to be used regularly, you can invest them in an interest-bearing product, such as a savings account, rather than keeping them in a non-interest-bearing bank account.
Remember that the money you save for your emergency savings must be accessible at any time. It’s therefore important to put it in a safe, low-risk vehicle such as a regulated savings account like the Livret A, Livret Jeune, or Livret d’Épargne Populaire (LEP) (subject to maximum income limits). These regulated savings accounts are attractive because the principal is guaranteed and the interest is tax-free.
Review Your Goals
Review your financial goals regularly. Your family, personal, or professional situation can change quickly, and this can affect your budget.
Even minor changes can affect how long it will take you to reach your savings goal.
These changes may include:
- the arrival of a newborn
- buying a new home
- an increase in your property taxes
- a rise in electricity costs
When these events occur, you need to adjust your budget accordingly so that your emergency fund remains a priority.
Rebuilding the Fund After Use
Once you’ve built up your emergency savings, you can then allocate the excess portion of your budget to other projects or invest your money in financial, real estate, or other investments.
Once you have a financial cushion, you can also save for a little something extra, such as a vacation or a major purchase. Set aside a separate budget line item and calculate how long you’ll need to save to reach your savings goal.
SYSTEM CHECK
Choose a sustainable saving rate, automate it after payday and raise it when income rises.
- CFPB - An essential guide to building an emergency fund - United States - emergency saving principles.
- Investor.gov - Savings Goal Calculator - United States - goal planning.
- MoneyHelper - Emergency savings: how much is enough? - United Kingdom - emergency saving.
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