How to save for security without trading your lifestyle

May 19, 2024 | Insights

Calculate your savings ratio so that you get a grip on your financial security without compromising your lifestyle.
Last week, at the till in our local deli, a couple of customers and I talked about the new health facility at York, designed to identify and prevent future problems (rather than diagnose and treat existing problems). One of the customers in the deli recommended it (echoing my recommendation last week to get a health check!).

We all agreed that prevention was essential rather than cure, given how difficult it is to see a doctor at the local surgery these days, how the cost of non-government-funded health care is prohibitive, and how even statutory sick pay is hardly enough to cover day-to-day expenses.

However, prevention does not always work, and plenty of other non-health issues can lead to a sudden and unexpected call on funds.

Money always comes into it.

Two key financial ratios are particularly appropriate to the scenario we discussed in the deli.

Your savings ratio simply tells you how much of your gross monthly income goes into savings. If you save £5,000 pa from a gross income of £50,000 pa, your savings ratio is one in ten or ten per cent.

The other related ratio, your liquidity ratio, tells you how long your savings will cover your monthly expenditure. If your monthly spending is £1,000 and you have readily accessible cash savings (liquidity) of £10,000, your liquidity ratio is ten months.

What should your savings ratio be?

Your savings ratio will depend on how much liquidity you already have and how much you feel you need. The latter will depend on your emotional needs as well as the practical. A client of mine, for instance, insisted on keeping liquid cash of at least £100,000. Any less, and he felt uncomfortable, even though it was not financially necessary.

Consider factors such as State benefits, company healthcare, insurance policies, and business revenue projections.

What are savings?

Liquid cash, which you can get hold of in less than five days, is a security fund to cover you against unexpected expenditures (the car breaks down, for instance) and a sudden loss of income (you have an accident, break a leg and are forced to put your consultancy business on hold for a short while.) Savings directed into investments and pension funds will support your longer-term aspirations and retirement.

How do I cultivate a savings mindset?

George Classon, author of The Richest Man in Babylon, suggests that a little of what you earn is yours to keep. He recommends treating most of our earnings as belonging to someone else, such as utility companies, grocery stores, petrol stations, etc. What is left belongs to you and is yours to keep.

Thinking about “savings” in this way changes the dynamic from “giving” as much of it away to others to keeping as much as you can.

The balance between living for today and saving for tomorrow is a fundamental element of your mindset. This concept goes back to “enough”, knowing when you are enough and when you have enough.

Attributions and references

Photo attribution

Photo by 2H Media on Unsplash

Audio link

https://audio.com/jeremy_deedes/savings-ratio/

Other attributions and references

Clason, George S. The Richest Man in Babylon. Createspace Independent Publishing Platform, 8 Nov. 2017.

Taking it further

Deedes, Jeremy. Enough: Unlock a Life of Abundance Starting Right Where You Are. Melbourne, The Right Company Press, 28 Oct. 2021.

Related posts

https://wordsnotdeeds.co.uk/health-concerns/ 

https://wordsnotdeeds.co.uk/financial-ratios/ 

https://wordsnotdeeds.co.uk/financial-calm/

My name is Jeremy Deedes. I work with seasoned independent consultants to make sense of their finances and develop a better relationship with their money. This transformative approach allows my clients to achieve their personal and professional goals with confidence and clarity, paving the way for a calmer, more fulfilling path at home and work.

Discover your money maturity score by taking the Money Maturity Quiz at https://shrtm.nu/n2D. It’s free, takes only a few minutes, and you will get your score and recommendations by email immediately.

Then, use the link below to schedule a free 20-minute call with me so we can start you on the path to understanding your money and creating a new story to tell your family and friends.

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