Financial Reserve: How to Accumulate and Preserve Savings in Time of War
Saving to see you through hard times is always important, but in the event of a full-scale war, the need for such cash reserves increases dramatically. Saving money is often difficult due to low income or lack of job security. Therefore, IA "FAKT" will consider ways to save effectively in wartime and how to ensure financial security.
According to the NBU, in the first three months of 2024, the volume of non-bank cash reached 4.1 billion USD compared to 3.2 billion USD for the same period in 2023, which indicates an increase in the volume of cash. In March 2024, non-bank cash was $1.07 billion. For comparison, in March 2023 this figure was 1.19 billion US dollars, while, for example, in September 2023 – 771 million US dollars.
However, experts point out that these NBU statistics may not reflect the real situation, because they do not quite accurately take into account the outflow of cash from Ukraine.
What is a financial cushion and what should it be?
Savings for investments and other purposes cannot do without creating reserves. In the event of a full-scale war, the importance of such reserves increases several times for obvious reasons, so earnings should be directed primarily to their formation. The size of the financial reserve (safety cushion) should be equivalent to 6-12 monthly expenses. For example, if the income is 20,000 UAH per month, and the expenses are 15,000 UAH, then the minimum reserve fund is: 15,000 x 6 = 90,000 UAH. Of course, given the rates of currency devaluation, the entire amount should not be kept in hryvnias.
How to create such financial capacity?
According to experts, saving is a skill that should become a habit. The most important factor in the development of this habit is not the amount of savings, but the ability to save regularly, and not to spend all the profit to the last penny.
The best strategy for beginners is to save 10% of your salary. It is important that this is done immediately after receiving income, and not at the end of the month, when most or even all of the money has already been spent. For your brain and usual way of life, this 10% will be almost imperceptible.
You can use life hacks to automate savings. For example, regularly rounding the balance on a bank card to the nearest 10 or 100 hryvnias (Like the “Piggy bank” function in the Privat24 application).
If the small amount on this card is not enough to motivate you, you can open a short-term deposit that can be replenished. This helps to “protect” your savings from your impulsive spending, and the interest on the deposit will be an incentive for even greater savings in the future. A deposit does not significantly increase capital, but it can be a good first step in forming a savings habit.
Accumulations should be purposeful. Without a specific goal, it will most likely be quite difficult to get started. The best solution is to create a financial plan. Start by writing down your money saving goals. The first step is to create financial freedom or security, then save for the purchase of equipment, a house or a car, children’s education, travel, etc. Decide on the value of your goals and the time frame in which you can earn the required amount of money. This is how it will become clear how much you need to save each month.
Thus, purposeful and disciplined savings, which are also supported by a clear financial plan, can really help you effectively manage your finances and achieve your goals.
How to accumulate funds under the influence of the general state of the economy?
Accumulation of funds is really strongly influenced by the general state of the economy, including inflation, interest rates on deposits and bonds, as well as exchange rates. The most common method of saving in Ukraine is the purchase of foreign currency, primarily US dollars. It is optimal to have 70% of funds in foreign currency and 30% in hryvnia. The advantage of foreign currency is that it is highly liquid and can be easily and quickly exchanged for hryvnia. It will also be useful to keep enough money at home to ensure a comfortable life for 2-3 months, and invest the rest wisely.
Another option is to buy gold in banks, but currently the price of gold has set a new record on April 12, 2024. Gold topped $2,400 an ounce for the first time.
In order to accumulate as much as possible, it is necessary:
- Systematically save a certain percentage of your income. 10-15% of the salary, as well as additional funds. The process should be automated, for example, by transferring funds to a separate account immediately after receiving income;
- Reduce regular unnecessary expenses and try to avoid unimportant purchases. No one is talking about completely giving up entertainment and getting some kind of “moral reward” for yourself, because then why earn money at all? It is only a matter of being competent about this issue;
- To look for additional work in your free time, which will help you not only to suspend expenses from “nothing to do”, but also to accumulate additional money faster;
- Invest and increase “free” funds.
Where and how to invest for savings?
Investments can really help people accumulate the necessary amount faster, but the shorter the goal, the more reliable investment options: deposits, government bonds, savings accounts. If the goal is long-term, you can consider more risky and profitable instruments, for example, securities on the world stock exchange, real estate, land.
The investment portfolio itself depends on many factors, including experience, risk perception (i.e. the amount of possible losses), investment duration, liquidity and available products. There is no one-size-fits-all approach, but fairly universal advice would be to outline three elements: current savings, target savings, and long-term savings.
The first component should consist of reliable and liquid instruments, such as foreign currency, deposits and government bonds, to cover current and unforeseen expenses.
The second is medium-term instruments, such as stocks and bonds, as well as mutual investment funds that track the movement of well-known indexes. It is important to diversify assets geographically, across sectors and currencies. This allows you to avoid the risk of losing all your savings at the same time.
In terms of financial instruments available in the local market, foreign currency, short-term deposits and government bonds are good options. The advantage of government bonds is that the income from them is not taxed. This means that you will receive the full percentage of the income specified in the contract, without any tax deductions. In addition, you do not need to pay commissions when buying OVDP.
From the beginning of the full-scale war to the end of 2023, Ukrainian individuals purchased 574,000 bonds for a total amount of over UAH 74 billion. As of January 1, 2024, the total portfolio of military bonds owned by individuals and legal entities reached UAH 85.4 billion, while at the beginning of 2023 this figure was UAH 34.5 billion.
These data indicate that the public’s interest in investing in government bonds is growing and this is due, in particular, to increased awareness of the importance of financial planning and asset protection in conditions of an unstable economy. Investing in government bonds has certain advantages, such as stability and guaranteed returns, as well as tax benefits and the possibility of obtaining additional income in the form of coupon payments.
In general, it is necessary to develop an appropriate financial plan and rationally allocate funds between various investment instruments, taking into account personal financial goals and circumstances.
Therefore, effective financial planning and investing are key elements of successful financial management in the face of economic instability. Diversification of the investment portfolio helps reduce risks and provides more sustainable capital growth. The high popularity of investments in government securities indicates the growth of financial literacy of the population and increased interest in protecting one’s assets, however, a necessary condition for successful investments is a careful study of market trends, risk limitation and constant updating of financial knowledge.
