Equally or more important than the amount you manage to save each month is how you manage that savings.
In times of crisis, savings gain special relevance in the family budget. For some of us, savings represent the first expense of the month, but for many others, it is an effort that is only possible with a lot of budgetary gymnastics. In all cases, however, saving means, in general terms, hoarding part of disposable income and containing all types of expenses.
Savings, however, lacks different levels of analysis, because, paradoxically, the simple exercise of saving for the sake of saving can be counterproductive?? Although we believe that every penny saved is in fact a penny earned, it is essential to have a sustained savings plan adjusted to each savings profile.
The importance of saving sustainably
As mentioned in the introduction to this article, just as or more important than the amount you manage to save each month is how you manage those savings. Let’s look at an example of a savings plan.
The first thing to do is build an emergency fund.
If you have budget space to save every month, add a sock for an emergency.
Just keep in mind that channeling money into this fund should not be an unlimited tasknot least because an emergency fund should only fulfill its purpose: having a financial cushion to support current expenses during a certain period of time (between 6 and 12 months), in case you become unemployed or lose part of your income.
For example, if your monthly fixed expenses (such as rent) and variable expenses (such as household expenses) total an average of €800 per month, your emergency fund should have a total value of €4,800 (800 x 6 months).
In other words, the first step is set a savings goal for this background and, from here, think of other ways to value your savings effort.
To better manage your fund, it is advisable to open a savings account, therefore, a financial product with guaranteed capital and easily mobilized. At this stage, it matters little whether the rate of return is minimal or even zero, since the objective of the emergency fund is not exactly to generate profit.
Then overcome inertia
Once your emergency fund is set up, it’s time to look for other ways to make the most of your savings effort. As comfortable as it may be to continue feeding your savings account without criteria, you have to overcome inertia and never forget that inflation is the main enemy of your financial reserves??
Perhaps it is simpler to understand the impact of inflation on your savings through an example:
Let’s say you want to take a dream trip that currently costs 3000 euros. You can only channel 50 euros per month to your savings account (with zero return rate), which means that you will only have saved the money you need for your trip in 5 years.
But until then, the inflation rate, which represents the increase in prices of goods and services, will be, by hypothesis, 2% per year. When the time comes to make the trip you will have 3000 euros saved, but in the meantime the trip will already cost more money:
- Year 1: 3000 euros + (1 + 2%) = 3060 euros;
- Year 2: 3121.20 euros;
- Year 3: 3183.60 euros;
- Year 4: 3247.20 euros;
- Year 5: 3312.10 euros.
This means that, from the moment you start saving until the time you take the trip, your money will devalue by around 312 euros.
For this reason, it is important to invest your savings in financial products that have a rate of return higher than the inflation rate, otherwise your savings effort will be counterproductive.
Saving and investing, two sides of the same coin
Before investing part of your savings in a financial product with a more attractive rate of return, remember three things: you can start investing with little money; investing is as simple as contacting your account manager; never invest in what you don’t understand.
Having the money in a savings account, as shown, may not be a viable alternative in the long term, so it is important to look for other financial solutions (mutual funds, PPR funds, financial insurance, for example) that are suitable for your savings goals, but above all to your investor profile.
Savings and investment diversification are two of the main golden rules of personal finance and, if you like, two sides of the same coin. Having a diversified asset means that your investments are less vulnerable to market fluctuations and, therefore, more financially protected. There’s a proverb to “don’t put all your eggs in one basket”…
At the end of the day, the goal is to make the most of your money, value your work product and keep yourself motivated to save money. Ultimately, be prepared for any financial unforeseen events, plan a comfortable retirement, have the resources you need to make your dreams come true.
Article originally published in April 2021. Updated in December 2022.