Savings or financial reserve? How do the two terms differ? What should be the priority of a fiscally responsible person?
The terms for savings and financial reserves are widely interchanged, and we are no exception. Therefore, we decided to explain both concepts in detail and give suitable examples.
Savings and financial reserve are an integral part of building financial assets. One concept cannot be without another. Together, they form a solid foundation for the financial future.
In both cases, you postpone immediate consumption further into the future. It is worth mentioning that headless building of savings or financial reserves is not appropriate when your finances are not completely in order. Alternatively, you have a sufficient amount of funds saved sideways and at the same time you repay an expensive loan, which would be more advantageous, with regard to the interest rate and other related costs, rather to repay the entire reserve.
Financial reserve means the deferral of funds for a period during which you will not receive income from your current activities. However, this time cannot be predicted very well in advance. Typically, this is most often a loss of employment and the associated loss of wages or salary. You will also use the financial reserve if you encounter, for example, a longer illness or a reduction in income from employment or business. As they say, vouchers do not wait and it is necessary to pay them constantly.
The size of the financial reserve depends on your expenses and life situation. Single people without partner or financial liabilities may have a lower reserve than people who repay, for example, a mortgage or have acquired offspring. The lowest possible financial reserve should correspond to three times your current monthly expenses. In some sources it can be read that it should be three times your income, but what if your living costs are low, for example half what your income is? You will needlessly keep excess money on standby. Instead, you can put them aside for further savings and systematically increase their value.
When defining savings, we come up with one of the biggest and probably the most noble goals, namely old-age insurance. At retirement age, your view of past and future life will be adjusted. Just like your income is most likely to drop. The old-age pension is generally lower than the previous income from economically active activity.
The savings should go mainly to ensuring for you dignified conditions of autumn life. It is in this phase of life that nothing can be saved, because there is nothing out of it, and at the same time the time is right when savings can be cautiously dissolved into the whirlpool of everyday expenses. It is in this situation that you will appreciate that you have once been able to save many crowns in the past.
However, it is not the only dogma that you have to use money sideways at retirement age. It will also fulfill its role when you need a larger amount of money. For example, to buy your own home or to start a business.
Where do the savings and the reserve belong?
While the financial reserve belongs unconditionally to a savings account with a good interest rate and immediate availability. This means the absence of a notice period, which would unnecessarily prolong the handling of money or would be charged.
Such a strict restriction no longer applies to savings. If you are just starting to build savings, logical storage is in the already mentioned savings account, in the case of a larger volume then a term deposit. No need to limit yourself to deposit products. If you comply with the principles of investment security, you can also set aside part of the funds in such instruments as shares, open-end mutual funds or investment certificates, or combinations thereof.