How to build a healthy financial buffer
A financial buffer is a sum of money that you can immediately access in the event that unforeseen items break down or need to be replaced. Think of household appliances such as a washing machine or oven. Perhaps your car suddenly breaks down, but you can’t do without it because you have to drive to work. There are many situations in which you are faced with unforeseen financial setbacks. You should be able to absorb these types of setbacks without this affecting your ability to meet your fixed (housing) expenses. How large such a financial buffer should be depends on your personal circumstances and varies per situation.
What is a financial buffer?
A financial buffer is money that you keep aside as a reserve, which you can access at all times. You can fall back on this in case of unexpected costs or if your situation suddenly changes completely.
A distinction is often made between two types of financial buffers:
- Financial buffer as a backup for unexpected costs.
- Buffer for a drop in income (for example dismissal or long-term illness).
The greater the costs or change in financial situation, the more you ask of your buffer. The financial buffer should cover the following:
- Replacement of your household effects
- Maintenance costs of house and garden
- Unexpected bills (as far as you can estimate this)
- Replacement of the entire car or repairs to the car.
What financial buffer is needed?
Without a financial buffer, you can quickly get into trouble. Either the bill remains unpaid and you run the risk of encountering the collection agency or the bailiff or the doorstep, or you can no longer pay certain fixed costs. That can also have unpleasant consequences. Unforeseen expenses are quickly lurking. A defective laptop, a major repair to your car or medical costs that are not covered by the policy or the deductible. However, those who have built up a financial buffer will not immediately get into trouble.
How high this buffer should be depends on the following circumstances, among others:
- Your family situation. Do you have children or a partner?
- The income. Are you a single or dual earner?
- Your living situation. Do you own a home or rent a home and what are the monthly costs for this?
- Monthly recurring costs. What costs are involved, what is the amount? Do you possibly have one or more loans that fall under this?
- Opportunities to save. If your income suddenly drops, to what extent can monthly expenses be cut?
- Private car. What is its current condition and value?
Obviously, a single earner with three children needs a larger buffer than a dual earner without children.
Someone who drives an expensive car has to deal with higher costs than someone who drives a second-hand car that has already been fully depreciated.
As a rule of thumb, a single person should have a buffer of two to three monthly salaries, a cohabiting couple without children should have a buffer of three to four monthly salaries, and a family with children should have four to five monthly salaries.
Furthermore, the handy buffer calculator of the Nibud gives you insight and advice on what your financial buffer should be. It calculates step by step what the amount of possible unforeseen costs is that you may have to deal with. Do you have less cash reserves than is advised? Then put aside an amount every month and work slowly towards the desired buffer amount.
What financial buffer should you create?
The Nibud advises a four-person household (married couple and two children) to maintain a buffer of €5,000.
If you have a multi-person household (married couple and two children), a home and a car, a buffer of €9,200 is advised. It should be noted that a higher buffer is advisable for unforeseen expenses on the home or car.
A buffer of €3,550 is recommended for a single person and a buffer of €4,000 is recommended for a couple without children.
A financial buffer alone is usually not enough
A buffer does not provide for lower income due to unemployment, disability, fluctuating income or reaching retirement age.
The buffer also does not take into account things like your child(ren)’s education or additional repayments on your mortgage. For this you have to put aside extra money or take out a loan. You can also invest defensively .
How do you build up a financial buffer?
Now that you know what you need a buffer for and how big this buffer should be, the question remains how to build it up. You don’t have to have a financial buffer together right away, you can build it up by saving or investing . Or even better: a combination of both.
Some tips:
- First, gain insight into your income and expenditure, this is a good starting point. This way you know what you can possibly save/invest and where you can possibly save.
- Set aside money structurally. For example, immediately deposit money into a savings account or investment account after receiving your salary.
- Save on your mortgage. By refinancing your mortgage you may benefit. You can also pay off to reduce your fixed costs.