Did you know that almost one in four people (23%) with a household income of £100,000 plus, have less than the minimum recommended amount in savings? They have fallen into the savings gap. But what is it? And how can it be avoided?
What’s The Savings Gap?
The savings gap is exactly what it says on the tin; a gap within savings. We all need some extra stashed away to cover life’s emergencies, but those that have have fallen into the savings gap don’t have anything to fall back on.
Who Is Impacted By This?
It’s a scary thought that more than one in ten (12%) of households bringing in £150,000 or more couldn’t last a single month on their savings. That said, this is lower than the overall figure, because in general 23% of people couldn’t last a month on their emergency savings. However, it still shows a worrying lack of resilience among higher earners.
One in four higher earners have fallen into the savings gap and haven’t built up the bare minimum of a financial buffer. It leaves them incredibly vulnerable to any nasty surprises that life has in store.
Some high earners have been scuppered by sky-high bills, while others have been lulled into a false sense of security and some have just never considered how much they might need to save. Whatever the reason, it means thousands of higher earners are far less financially resilient than they need to be.
Why Do High Earners Fall Into The Savings Gap?
With high earners, spending tends to expand to fill the cash available. That means there’s nothing left to put aside for emergencies. Perhaps you live in a property with a large mortgage. Maybe you have children at private school. Or you could be paying for a high-end car. All these things may feel like necessities that you can’t scale back in order to free up cash for emergencies.
Those who earn more may also be more comfortable going into debt to cover emergencies. This is because it will take less time to pay it off if their income stays the same. Previous research has also shown that the more people earned, the more likely they were to overspend each. That means that they were more likely to end up in the red each month.
But unless you’re on a high guaranteed pension, you can’t always guarantee you’ll earn at this level. Say you were to lose your job, or fall ill and you were unable to work. Would you suddenly be much less comfortable with this level of debt? By then it might be too late.
Cash Is King
High earners may baulk at keeping so much in cash, especially while interest rates are so low, so they might want to put it into investments instead to make it work harder. However, this is a risky approach to something that should be entirely risk-free.
The only sensible home for emergency savings is an easy access account. But don’t let it languish in a high street account, where you’ll typically get 0.01%. Consider newer and smaller banks which offer the same protections as the high street, but far more interest.
Planning For The Worst
There’s also the risk that higher earners haven’t really thought through how much money would be needed to cover an emergency. They may have just plumped for a specific sum that ‘feels right’. In reality the right level of savings is between three and six months’ worth of essential expenses.
How Much Do You Need?
If you wnat to avoid falling into the savings gap, you need to consider which of your expenses are essential. It’s not necessarily just about keeping a roof over your head and paying the bills, there may be other regular payments you have to keep up.
Work out where, on the spectrum of 3-6 months’ worth of expenses, you should sit. Start with how much of a safety net you’d feel comfortable with. You also need to add in your work situation: whether your income varies, if your job is at risk and how long you’d expect it to take to find work again.
Finally, you should consider your broader circumstances, like your health, your caring responsibilities and the health of those you are responsible for looking after.
