Experts disagree on realistic emergency savings buffer

Thirty-eight per cent of Finns have no savings for unexpected financial difficulties, according to a Danske Bank survey reported by Yle. The bank recommends building a buffer equal to four months of expenses, but the head of the Guarantee Foundation says that target is unrealistic for many people.

Kaisa Kivipelto, Danske Bank’s private finance economist, recommends that people save enough to cover four months of expenses in case their wages suddenly stop.

Juha Pantzar, chief executive of the Guarantee Foundation, said the survey’s findings were broadly in line with similar studies from the past five to 10 years. He said, however, that a four-month buffer would be difficult for many Finns under 40 who have not received inheritances and are in the process of starting families.

Pantzar considers savings covering one or two months of expenses a good target for unexpected changes in people’s circumstances. Even that is not possible for everyone, he said.

According to the research institute Labore, government cuts to social security and tax reductions have led to a larger than expected increase in income inequality. The number of people on low incomes has increased by almost 99,000 as a result of government decisions, when low income is defined as less than 60 per cent of the population’s median income.

Finnish households already hold substantial savings. Markus Aaltonen, an adviser at the Bank of Finland, said deposits reached a nominal record of more than 118 billion euros at the end of June. The figure does not account for inflation’s effect on purchasing power, but the total amount of savings remains high.

Most deposits are overnight deposits, which include current accounts. They have grown by 2.9 per cent over the past year, although the growth rate has slowed this year, Aaltonen said.

The value of Finns’ mutual fund investments also reached an all-time high at the end of June, exceeding 60 billion euros. New net investments in funds have increased recently, meaning more money has been invested than withdrawn.

Pantzar said the people who accumulate savings do not necessarily have significant spending needs. Older people often already own their homes and other necessities, he said. At the same time, people who need to start families, buy larger homes and meet other expenses may have less financial flexibility.

For people who cannot save or build an emergency buffer, Pantzar said there is no quick solution. Expenses must be reduced below income, he said.

He recommends paying off credit card debt before focusing on saving, if possible. Interest rates can be around 12 per cent, which he described as high if the balance is not paid off immediately. An unused portion of a credit card limit can also provide a buffer when unexpected financial problems arise.