This article will endeavour to give an answer to the question: What is the best way to save for a rainy day?

Also; the wealthy tend to have a variable gold reserve; they buy and sell it as needed on a regular basis. This is rather pricey for a medium salary, but does point out that cash is not per definition the only option for storing wealth.

Fixed amount for fixed expenses

This method requires you to have several months worth of fixed expenses in a savings account. Not bad, it just ignores variable expenses, which tend to increase in case of trouble; for precisely the reason that they vary*. This makes it sub-optimal to use fixed expenses as the sole base for you cash reserve. But it does provide a clear number, which is good, so go ahead and use it; just don`t expect to need only that cash amount for precisely that many months.

Fixed amount general

The same advantage as above, just not directly based on your expense pattern. With this variant you can add variable and recurring non-fixed expenses to the mix, which does result in a more reliable amount.

You can also decide on a number which you yourself consider to be realistic for an situation in which you would require several periods worth of expenses in hand. The amount would have to be over 10.000EUR, quite possible a multiplication of that.

Percentage of salary

A different approach, instead of having a goal to save towards, we simply put some money aside each time payday arrives. This method will likely result in the highest amount of money, due to accrued interest and principal, but only if you actually keep it there. Should be noted that simply storing money in a bank account is unlikely to be very efficient, as it just sits there doing nothing but be outpaced by inflation.

However, you will have plenty of money readily available, so it does meet the basic requirement of avoiding genuine hardship through insolvency.

Percentage of assets

This particular method is only viable if you are above average wealthy, in assets that do not fluctuate to the same degree. If they do, you will actually need more cash, just to compensate for that risk. But it is a good method; you will not keep more cash on hand then needed, as most assets (equity, funds participation and precious metals just to name a few) can be sold with cash in bank account in around 2 days time. So you only really need to be able to pay for about a week.

Keeping a reserve of about 5% should be plenty, with more just before bills are due, as other costs are unlikely to be higher.

Conclusion

The best method is likely to be a combination and tailor made to your needs: It has to be what you need and for how long you expect to need it. Saving a percentage of salary is a good way to get started, after a while you will have both a high percentage of assets and months salary saved, so you can afford to invest or otherwise spent some. Just make sure that you have enough or can liquidate enough assets to pay for due bills.

What if you genuinely cannot save

Let us start by clarifying that the author believes that everyone can save money in every situation; it is all about making decisions about what is more important (he does admin to having difficulty saving at times). But inflation has made it abundantly clear that sometimes costs go up, whilst income does not or to a much lower degree. During such times it can be difficult to set money aside.

In such a situation, you can look around your house and decide in advance what can be sold and for how much (remember to be realistic and maybe do some research).

 

*Companies decrease in varied costs as the situation sours, private individuals actually have to make costs in case of trouble: If your car breaks down it needs to be repaired.