Many of you most likely have heard the term “financial airbag” and can guess what it Nofollow means.
If the financial situation in a family is favorable, then all kinds of crises, dismissals, and other negative events seem to be somewhat distant and unlikely. But when a family income is already low, creation of savings is a complex and pointless exercise.
Why is it so important to have a financial airbag?
The term “financial airbag” refers to an accumulated amount of money that allows for a person to live for a period of time in case of loss of the main source of income. Theoretically, it should help to maintain the same expenditure level and the quality of life even in such dire situations.
As mentioned above, the main reason for creating a financial reserve is an unexpected loss of income. There is always that risk and even a good professional usually needs some time to find a job with a comparable level of income. Other vocations may simply fall out of demand in times of crisis. In circumstances like this, it is best to keep your savings safe, and understand that if you have a family to feed, the problem can aggravate to a critical level very fast.
In such situations, a person often rushes to extreme measures: gets a low-paying and unattractive job, plunges into a debt pit. The repercussions of that have to be cleaned up over the years. If you have a financial reserve, you are able to survive difficult times much easier – even psychologically the person will feel much more confident knowing that he will not have his back to the wall and even if he’s between jobs, he can live a few more years without lowering his normal and established standard of living.
Even without taking into account a loss of income, no one is insured from other troubles and there can always be a situation when you may urgently need a large amount of sum. For example, you may need it for a medical emergency, to repair a damage caused by you, for a forced move, etc. Having a financial airbag will greatly ease difficult periods in life and allow you to deal with problems with no outside help.
How can you create a financial airbag and how much to save?
Everything is quite down-to-earth – for a family to have some savings, they have to start saving money on a regular basis. We will talk about how to do this later, and now we will consider the very principle of calculating the amount of the so-called airbag.
- You need to understand how much you spend on average per month, including on clothing, car, and entertainment – all your expenses.
- As a rule, a financial airbag is created for the period from 4 to 36 months.
- The size of a financial airbag is calculated by multiplying the amount of monthly expenses by the number of months you want to create a money reserve for. For example, if every month you spend approximately 5,000 dollars, and you plan to create financial insurance for a year, you will have to accumulate 60,000 to implement this plan.
Yes, it is certainly not easy, you need to have a large enough spare money, and you need to build it up from the very beginning of earning an income.
How to start saving money
As we know, money doesn’t appear out of nowhere. To start saving, you will either have to reduce your expenditures or earn more by starting to look for additional sources of income.
One common way is to keep back 10% of your salary and all other incomes. But theoretically, this method does not work, because to create an airbag for 1 month you’ll have to wait for 10 months, and you’ll be able to have an airbag for 1 year in 10 years. Certainly you can do that, but a financial airbag should not be the goal of your life, because you still have to earn money for your house, car and other major purchases.
We recommend you to review your expenses, to take a comprehensive approach to personal finances and to try to allocate a larger share to your financial airbag. You should try to create passive sources of income or just additional ones. Since the financial airbag is a part of personal well-being, the same goes for its other elements. A financial airbag should be addressed in your income increase plans.
Still, you have to keep saving 50% or 10%, or even 5%, it is much better than having no savings at all.
So the important thing is to do it as soon as you receive the money. Many people who plan to build up savings plan save the amount that will remain in their budget at the end of a month. However, as a rule, by then there is no money left at all, and the whole idea is carried over to the next month, and that happens again and again. This is usually the type of people who like to start a new life on Monday, quit smoking and drinking next month, take exercises right after the next New Year’s day, etc.
If your salary is deposited to your card, you can set up an automatic allocation of a certain amount. Most banks provide an Internet banking service where you can set up a monthly transfer to your financial airbag account.
The basic idea is that you should not wait for an instant result. Certainly you’ll hardly find yourself much richer just a couple of months after you start saving. But when you really need some money, and this can happen in 5 years or later, you will be grateful that you have accumulated a solid amount for such a case.
How and where to keep your financial airbag?
There are many different ways to keep accumulating money. The best would be a bank deposit. It must be on-demand deposit with the option of depositing and withdrawing money from the account at any time.
You should open an account in a strong currency, which is not shaken too much by fluctuations in rates. It would be even better to do that in several currencies. Withdrawals from the deposit are usually made at a bank office upon application, which guarantees the safety of the funds, primarily from yourself.
You must not keep a financial airbag in cash at home. It’s believed to be the worst possible option. After all, there is a temptation to spend it at any time, and it might not last long that way.
What definitely should not be done with the money from a financial airbag is investment, because any investment is a risk, and your financial airbag is created for the purpose of having cash without risking. And you can’t be sure that in case of some urgent need you will be able to withdraw your money from investment projects without losses.