Here at thinkmoney, we think it's a good idea to have the equivalent of three months' salary set aside in case your income drops or you run into any other financial problems. It might not always be achievable, but it's certainly something worth aiming for.
Saving is a great way of preparing for unexpected costs, annual bills and important events - such as Christmas, birthdays, car repairs, servicing and insurance.
Plus, anyone's circumstances can change, at just about any time. If you lost your job, you may qualify for benefits or Jobseeker's Allowance, but it can take some time for this to be paid. Your savings could tide you over until you have money coming in again. You might want to read our article about the most common benefits available, as well as some you may not have heard of.
Children also cost money and if you take maternity leave you will probably have a significantly reduced income for a period of time. Having said that, you can usually plan for this kind of event, while financial emergencies such as dental treatment, illness or the boiler breaking down can be a complete surprise - and without savings, you may need to borrow money to meet those costs.
Savings v Debt
Saving isn't possible for everyone: repaying debts may take priority and it's only possible to save when you have 'spare' money. When you're living to a strict budget there might be little or no spare money to set aside.
If you have debts, there are arguments for and against saving (rather than putting everything you can towards your debts).
The argument for saving
Savings can provide a great deal of financial security - and even people on a budget and with debts to repay may be able to cut back on certain elements of their spending and put that money into savings. Remember that three months' salary is a guide. Any savings will provide more security than none.
The argument against saving
Repaying debt is important, especially when interest is accruing on that debt. You can earn interest on savings, but interest on debt tends to grow significantly faster. In many cases, it's better to pay off debt faster than you actually have to, to avoid that extra interest.
Just remember that some debts can levy 'early repayment charges' if you repay them earlier than agreed, so it's worth spending some time working out which option will save the most money in the long term. A financial adviser could help you with this.
Budgeting for Savings
You may be able to save money on things you're already paying for, so you can put it aside for that rainy day. For example, if you have insurance policies, you might be able to find a better deal by shopping around.
If you're paying a lot of interest on a credit card, you could find out if you can transfer the balance to a card that charges less interest (or none at all, for a limited period).
And you may be spending more money than you need to on your bank account. Charges for bounced payments or accidentally dipping into an overdraft can add up over the course of a year if they happen frequently enough, so it's best to try to avoid them altogether.