In short, a buffer is a form of saving that you have available for unforeseen expenses and emergency situations. It could be if you lose your job, the car breaks down, all your teeth come loose or something completely different. Something about life and all the unpredictability that life’s journey entails.
Here I will guide you to find a buffer size that makes you feel safe if your finances change significantly from one day to the next.
How to calculate your buffer
When you need to calculate the size of your buffer, there are several things to consider. There is no one right way to calculate a buffer. You have to find your own way so that you end up with a buffer that makes sense for the life situation you are in and your willingness to take risks. So you have to find out what size buffer makes you feel safe.
Therefore, I would recommend that you go through the following categories and consider them thoroughly so that you can learn more about how you can put together your own safety net. I’ve divided it into categories to make sure you think ‘all the way around about your finances.
Feel free to find a piece of paper where you can continuously write down the numbers you arrive at and which you will use when you finally have to calculate the final buffer.
Willingness to take risks
First, I think it’s incredibly important to find out how much of a risk appetite you have. Does it feel safe to have a buffer that can cover all fixed expenses and consumption for 1, 3 or perhaps 6 months?
Here you can, for example, also take into account job security and the insurance you have in relation to your work. I elaborate on that further down.
While you go through the categories below, keep in mind whether it is savings for 1, 3 or 6 months. expenses and consumption that make you feel at ease. Or maybe something completely different. 1 year – only you know. It is important that you are honest with yourself here.
You should make a thorough budget that not only includes your fixed income and expenses but also your consumption, food, household and transport. Create an overview of how long you will be able to manage if the economy changes significantly.
My recommendation is to make two budgets, where one is a ‘nice to have budget’ and the other is a ‘need to have budget’. In this way, you can become aware of which expenses you will be able to eliminate if your financial situation falls.
How is your job situation? If you lose your job, is there good job security, or is there a high risk that you may be unemployed for a long time?
How does your current income compare to what you would be paid if you were on unemployment benefit? Will your income drop significantly if you receive unemployment benefits, or will you still be able to pay your fixed expenses?
The difference between your current income and your eventual unemployment benefit income is important here. If, for example, it is not possible for you to pay your fixed expenses (including food and the most necessary consumption), if you are on unemployment benefits, you must put money aside for this in your buffer.
This is where the annual budget comes into play again. When it is filled in, you have a good overview of the size of your monthly expenses and the available amount you have with your current income.
Make a copy of your budget and insert the amount you are reported for in unemployment benefits instead of your salary. Then you can see how your finances fit together if you are unemployed for a period of time.
Now find out how large an amount this should amount to in your buffer. Remember to keep your risk appetite in mind here.
Your housing situation has a lot to say about the size of your buffer. If you live for rent, you do not need to set aside a large amount here, as the landlord will be the one responsible for the ‘heavy’ items in terms of maintenance.
Here you will be able to settle for setting aside money for rent, electricity, water, heating etc. Also, extra bills, which may arise due to higher consumption of or prices for electricity, water and heating.
If you own a home, whether it is a house, an owner-occupied or a rental, you must find out what expenses may arise in this connection, as well as what the insurance covers.
What can break that urgently needs to be repaired and that the insurance, owners’ or cooperative housing association does not cover?
If you live in a new building, you probably have to set aside a smaller amount than if you live in an old house and know that the roof of the house ‘sings on its last verse’.
It’s not because you need to have money set aside for a complete renovation – you need to find an amount that can make you feel secure.
So if the toilet breaks, a water pipe bursts, a hole in the roof or whatever happens in your home, you must have a buffer that can cover this.
Here again, you have to find an amount that makes you safe if an expensive situation arises in your home.
If you own one or more means of transport and you depend on them for your everyday life to function, you must include this in the calculation of your buffer.
If you need one or more cars, there must be enough money to cover a trip to the mechanic. If, for example, you cannot get to work unless you have a car, this is a very important item to be aware of.
You should also check how your car insurance can help you here. Cars and car insurance are different, so investigate how much money you may have to pay for the excess if the car needs to be repaired.
Also, check what your car insurance covers. If things happen to the car that it does not cover, set aside money to cover it yourself.
If it is a motorcycle, electric cargo bike or perhaps a completely ordinary bike that makes your everyday work, then this is what you need to make sure you have money to get repaired – or money to cover the deductible on your insurance, if the accident is out.
During transport, you, therefore, have to find out how large a sum of money needs to be set aside to repair what is essential for you, to make your everyday life work together, and to make you feel safe.
Most of us now find it difficult to manage without a smartphone. Some of us also depend on having a computer to do our work.
If there are any electronics you can’t make your day-to-day function without, you need to have money set aside to replace or repair them if you lose them or break them.
Also remember that this also covers things like fridges, ovens, washing machines and dishwashers and the like.
If you have electronics insurance, investigate how you are covered by it, and either set aside money for any deductible you have through the insurance or to replace or repair the item(s) you cannot do without or cannot wait for, that the insurance can replace.
If you have one or more animals, make sure you have set aside money for vet visits. If you have three horses, the buffer should probably be quite a bit larger than if it is a goldfish.
Also check here what the animal insurance covers and how big your deductible is, and set aside an amount so that you can take care of your animals’ possible needs for medicine, vet visits or the like. even if you were to lose your job.
Is there anything else you can’t live without that can become a semi-expensive pleasure if you lose it or it breaks?
Maybe you use a hearing aid, dentures, bite splint, glasses, prosthetic leg, wheelchair or who knows. Think through your everyday life and make sure that money has been set aside for what you really cannot do without.
Now add the amounts together and see the size of the buffer.
How does it feel?
Is it too much, too little, safe or unsafe to have a buffer of that size?
Maybe you feel good about being covered with the ‘worst case scenario’ on all items.
Perhaps you are fine with lowering the amount a little, as the ‘worst case’ rarely happens in all areas at once.
Go with the total amount that makes you comfortable.