Last week we discussed the role that saving plays in creating a secure financial future. Saving helps you to develop the discipline required for money success; experience money accumulation, not just money attrition; amass emergency funds; and build a solid base to boost your investments.

An important part of planning for your finances involves determining areas of risk which could potentially jeopardise your ability to realise your objectives. Once you have identified these factors, you need to implement strategies to avoid or mitigate these problems as best as possible.

Like any other aspect of your finances, your savings are subject to certain dynamics which can put your money at risk. Let’s examine some of the various situations and challenges which have the potential of crippling your savings goals.

Visualise your savings as a vulnerable fort which you need to defend from attacking forces. There are two categories of enemies that need to be repelled — those that stop money from flowing into your coffers or reduce your return on savings, and those that deplete or destroy your nest egg.

Sources of savings growth

For most people, a job or business income is the main source of funds to boost their savings accounts. However, if your income is stretched to the limit to cover your bills and basic expenses, then you could decide to curtail or discontinue your savings to try to make ends meet.

It would be even more difficult to maintain your savings habit if there is no money coming in at all. Your contributions could also be negatively affected if your income is diminished by illness or job loss, or if your business is unprofitable and it can’t afford to compensate you with a regular salary.

When you save money in an account, you are lending your money to the financial institution and you should receive a return in the form of interest. However, some types of accounts pay low or no interest, and you could lose a potential source of added funds by saving in the wrong account.

Protecting savings inflows

Whether you are an employee or self-employed, you should try to create income streams that will generate money with minimal effort after you have done the initial work. In future columns we will look at options to earn passive income that can help you to pay bills and maintain your savings.

Depending on your type of profession, and your ability to afford the premiums, it might also be worthwhile to purchase an income-replacement insurance plan. This would provide you with a portion of your regular income in certain situations that may render you incapable of working.

When selecting a savings account that will give you the best possible return, ask for the type of plan that will pay the maximum interest for the amount you are contributing. As your nest egg grows, periodically assess if it’s opportune to transfer your funds to a higher-interest account.

Sources of savings loss

Insufficient earnings or loss of income are major threats to the longevity of many people’s savings plans. Very often, people are constrained to raid accounts that were intended for specific goals in order to get money to cover their regular bills or deal with emergency expenses.

It can be psychologically distressing if you are forced to remove money from a long-term savings plan such as home acquisition or retirement. You may even give up on the idea of saving after the first breach is made, as it becomes easier to tap into your nest egg whenever another need arises.

Your savings accounts can also be depleted by financial institution charges such as minimum balance or dormant account fees. In addition, there is the possibility of fraudulent activity on your account such as the misuse of your ATM card, which can compromise the security of your savings.

Preventing savings outflows

Apart from diversifying your income sources to broaden your earnings base, you should also ensure that you put aside at least three months’ worth of your basic expenses in an emergency fund. This would prevent you from depleting savings accounts dedicated for other purposes.

It’s important to enquire about all the transaction costs and fees that are associated with saving in a financial institution even before you choose an account. If you have to operate an account that incurs fees, then modify its utilisation to ensure that you avoid or minimise the charges.

Check your account statements or use your financial institution’s online facility to quickly identify unauthorised transactions. Be cautious when using your ATM or debit card; look out for suspicious activity when using the machine and be present whenever your card is swiped to pay for bills.

It’s also important to verify the continued stability of your financial institution over time, as you have entrusted it with the safety of your savings. Your savings accounts should also be insured by the relevant authority in your country which protects the deposits in financial institutions.

Copyright © 2015 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, May 21, 2015.

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Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmart.org. Contact Cherryl