Phil Wheeler: Why everyone needs to put money aside for that rainy day

WE ARE all aware of the importance of building up a nest-egg on which to fall back on in times of emergency. Any financial adviser will agree that putting money aside for a rainy day is one piece of advice they will always give.

During these strained financial times everyone is tightening their belts and having to watch their purse strings. But the importance of saving is still as relevant as it was when the economy was stronger and there was more cash around.

Think back to when the washing machine broke down - but it was the middle of the month and there wasn't enough left in the bank until pay day to fund the repairs. Or a bill for central heating repairs landed on your doormat, and the cost was larger than your weekly wage.

These are the times when you dip into that savings account and breathe a sigh of relief that you had the foresight to set money aside for exactly these reasons - unforeseen circumstances. Even when money is tight, it is still recommended that we put aside a portion into another account, each month if possible. There is always the possibility of borrowing on credit cards or loans, but it is obvious that being able to use your own money without having to pay anything back, plus interest, is a better option.

At the moment, the City of Edinburgh Council holds just over 9 million in its general reserve and we are on track to increasing this to our target of 13m by March 2012. Sounds like a lot of money to be putting aside? Well, this will work out at roughly 1 per cent of our annual budget.

The ability to set money aside each year needs to be considered alongside other priorities of ensuring that the council continues to provide the best possible services to the citizens of Edinburgh.

Previous administrations have used reserves, outwith emergencies, to make up for budget shortfalls, but I believe that continuing with this practice would not provide the council with the financial stability it needs. Reserves are used in times of unanticipated expenditure or reduced income.

Despite huge pressures on the budget during the winter, we were able to avoid taking money out of the reserves, although in the future this may be unavoidable. Reserves can also be used, but only as a short-term measure, to compensate for overspending by departments, often due to increased demand for our services.

The council has procedures in place to control the level and use of reserves. Each year, our reserves are formally reviewed in relation to our financial risks, and the council, as part of the usual budget process, will make decisions regarding these. The full council is required to approve any contribution to or from our reserves, thus the public can see how its money is being used.

The council is a key provider of front-line public services, so when money is extremely short, as it is at the moment, it is vital to keep money aside. Imagine what would happen if we were not able to pay to clean up after a flood, for example - it is the responsibility of local authorities to pay in these circumstances, getting extra government funding in these situations is certainly not guaranteed.

With the UK government recently delivering the grim warning that public spending is facing colossal cuts, it is more important than ever that reserves are not allowed to fall to dangerously low levels. This is simply sensible and sound financial management.

lCouncillor Phil Wheeler is finance leader for the City of Edinburgh Council.