How to create a financial safety net – 3 essential steps to keep you and your family financially secure

When it comes to finances, a lot of people are looking for peace of mind. To feel financially secure, it’s important to know that your financial needs will be met even if something should happen to you or your partner.

Have you ever mapped out what would happen if you lost your job or got into an accident that may prevent you from earning a living for a few months. Can you continue to provide for you and your loved ones? Do you have something in place to make sure the bills continue to get paid?

One way to achieve financial security for you and your family is to create a financial safety net. This safety net can be a plan and money set aside for unexpected expenses or tough times. By having a plan in place, you can rest assured knowing that you and your family will be taken care of financially.

If you don’t have plans and savings in place for tough times, now is the time to get started.

How to create a financial safety net

1. Save an emergency fund

Saving an emergency fund is the first layer of your financial safety net. This is a fund that you set aside for unexpected expenses or emergencies.

Having this fund can help you feel more secure as you’ll be prepared for unforeseen circumstances like car repairs, a broken boiler, emergency vet bills or replacing your phone if it suddenly gives up the ghost.

This fund is meant for emergencies, and should be separate from other savings like your holiday fund or house deposit.

For your emergency fund, ease of access is more important than interest. You want to save it in an easy-access account where you could withdraw money to your bank account within hours.

Savings tips for building your emergency fund

Decide a percentage of your net income that you could contribute monthly. To make this step go even faster, add any bonuses, tax refunds, or round up your spending.

Do not raid your emergency fund for holidays or other non-emergency spending.

2. Build up a cash buffer

Once you have a healthy emergency fund, the next step is having three to six months’ worth of living expenses saved in an interest-bearing account.

Some people called this a “freedom fund” or a “f* you” fund, as this safety net or cash buffer allows you to quit a toxic job and survive while you’re looking for a new one. It could also be used to help you cover the shortfall in your income if you were to end up on statutory sick pay for a while. A cash buffer a powerful asset for financial stability.

How much cash buffer do you need?

First, figure out what you need to comfortably live on for a month. The starting point is your average monthly spend.

You could calculate your cash buffer using this sum, or you could trim some of the non-essentials like a cinema date or brunch with a friend. For a time you could switch to a lower cost option like a film night with microwave popcorn or a walk and takeaway coffee. It’s important to make sure you’re still doing some things you enjoy and not to assume you’ll be okay with eating beans three times a day and only socialising on Zoom while looking for a new job.

The aim is to find a realistic sum you could live off each month if all income stops.

Then multiply this number by 3 to start with. You may later feel more comfortable with 6 months’ expenses, depending on how easy it would be for you to replace (or partially replace) your income.

Once you know your cash buffer figure, start saving as much money as you can to build up this safety cushion.

If you’ve managed to build up an emergency fund already, you can use the same process to build your financial safety pot. For example, automate a monthly contribution to your safety net fund and add extra when you can.

Remember this money needs to be accessible if you end up needing it, but unlike an emergency fund you don’t need instant access. You might decide to buy premium bonds or put it in a fixed-rate savings account where you can access it with some notice.

Revise your safety cushion number periodically

Plan to come back and revise your monthly expenses number from time to time. Your living expenses may go up or down over time and you can adjust how much you need to set aside in your safety net.

Alternatively, you may have started with a 3 month fund, but decide to increase that to give you more wiggle room.

3. Consider insurance

Particularly for those with dependents, life and critical illness insurance can be part of your financial safety net. Does your family have enough in place to continue to cover your living expenses if you can no longer work? What if you or your partner have to give up work to care for the other?

Illness can hit any of us unexpectedly, so it’s good to have a plan in place.

You may have insurance from your employer, but look at the terms to check your policy will pay out enough. If not, you may want to get some additional insurance of your own or save more in your financial safety net.

4. Keep saving, or start investing

Once you have the three parts of your safety net firmly in place, consider investing any additional savings.

Investments are made with the long-term in mind. That is, money that you don’t expect to spend in the next 5-10 years. By investing it, you hope to gain better returns than you would in a savings account. As inflation rises, your cash savings lose value in the face of rising costs.

While you don’t want to be in a position to dip into invested money, it may come in handy when dealing with a long-term financial emergency. This is a fourth element to your financial backup plan.

If all goes well and it turns out you don’t need the money you’ve invested, your investments can help you to retire early or work part-time as you approach retirement.

Final thoughts on creating your financial safety net

A financial safety net is an important way to protect yourself and your family from unexpected expenses and get you through tough times. It’s important to come up with a plan that’s right for you and your family to give you peace of mind whatever the future may hold.

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