Shocks to the system
Who couldn't use three grand at the ready? Not to dwell on the negative, but it's not hard to see where it might come in handy: weather damage at home, work drying up, burglary, a car breakdown. We might get slapped with legal expenses or suddenly have to travel to a funeral.
A buffer reduces shock. It's a barrier between you and the unexpected. It's a solution.
Signing on to this solution is not overly difficult, either. Many times it just takes a choice to "pay yourself first" automatically online. Sure, it may take a while to put it together, but you may be pleasantly surprised to find it easier to achieve than you first thought.
Typically, people underestimate what they're capable of over time.
DIY insurance, for the smaller stuff
Whenever we use a company to pool our risk through one of their insurance products, we typically make a choice on how much they'll do and how much we will if something happens. That's what choosing an excess is about: we cover up to so much, then the company takes over when things get unmanageable for us on our own. Makes sense.
Now, the more of a savings buffer we have in place, the more risk we can handle ourselves. The good thing about having this option is that we can increase our excess and save money on premiums, since the company's effectively covering less.
DIY insurance, or being able to "self-insure" is just one of the benefits of having a buffer. But it's not even in the top 5…
Top five buffer benefits:
1. Weather those storms: Emergencies will happen, so we need to expect the unexpected. Rainy day funds give us the resilience we need when the storms hit.
2. Free up headspace: Everybody's got limited mental bandwidth in any given moment, and it gets overloaded when money is tight. Having a buffer set aside frees us up mentally to make better decisions. When it's hard to make ends meet, not having a buffer is the equivalent of trying to function effectively without a night's sleep.
3. Avoid crisis borrowing: Payday lenders don't exactly charge mates' rates. They may seem like the only option in a crunch, but if we crunch the numbers, we're the ones getting squeezed.
4. Lower your anxiety: Concerns about what could go wrong, especially about the money we might need in an emergency, typically drive anxiety levels up. A buffer gives us less to worry about.
5. Let your budget breathe: Trying to stretch a household budget too thin is a recipe for difficulty, so budgets need to breathe. Having a savings buffer to fall back on lets the budget, and us by extension, breathe easier when the unexpected happens.
This Money Week (3–9 September), make it your goal to build yourself a beaut of a buffer.
- Get Sorted is written by Sorted's resident blogger, Tom Hartmann (@TomHartmannNZ). Check out the guides and tools from Sorted – brought to you by the Commission for Financial Capability – at sorted.org.nz.
