Most South Africans do not realise the importance of having an emergency fund until they need some extra cash. Yet, building an emergency fund is one of the most important steps in taking control of your financial situation. When life happens and you are faced with an unexpected financial emergency, you need to be able to fall back on this fund rather than turn to debt.
The ideal goal should be to have 3 to 6 months’ worth of expenses saved up in your fund. This way, you will be able to survive until you get out of your emergency. This can sound daunting initially but the best thing to do is just start. Small steps now can make a big difference in the future.
What is an emergency fund?
An emergency fund is your liquid amount of cash saved up for an emergency. You should be able to access this fund easily and quickly. Having an emergency fund is the difference between a small bump to your finances and huge financial disaster.
An emergency fund can also ensure that you do not have to resort to taking out credit and end up drowning in debt. This way you can have peace of mind knowing you are able to tackle any situation thrown your way.
You should also consider keeping your emergency fund in a different account to the one you use on a regular basis. This is a good way to ensure you don’t end up spending your emergency fund on things you want rather than need.
Know when to use it.
Tapping into your emergency fund can be tempting to anyone when it comes to buying yourself and other’s gifts. But remember, it is for unexpected expenses. Only dip into it when you have a real emergency; car repairs, retrenchment, keeping afloat between jobs, medical expenses or a house repair.
Avoid spending your emergency fund on things such as holidays, electronics, or gifts for an occasion. You should consider having an entirely different fund for these types of expenses as they are not needed for your financial survival.
How much should you be saving?
The rule of thumb for an emergency fund is 3 to 6 months’ salary This amount may seem impossible to save up but once you get started you will soon see this build up.
Make this a priority for you and start saving what you can. Work out your budget and see where you can cut back for a few months to build up resilience in your emergency fund.
Help! My budget is too tight!
Here are some tips on how to find that extra cash in your budget:
- Are you overspending on takeaways? Rather cook at home but make sure you take a list with you to the store and stick to it. And definitely don’t go to the store hungry, you’ll only end up buying more and overspending.
- Review your debt repayments. Do you know what interest you are paying on your debt? Make a list and try and pay off the debt with the highest interest rate first. If you are over-indebted (more than half your salary is going towards paying your debt) then give us a call to see how we can help. We can also kick start an emergency fund as part of your plan.
- Cancel subscriptions you are not using to reduce your monthly expenses. Do you need the full DSTV subscription? Maybe explore alternatives. The current lock-down has also shown us all that we may not need our Gym memberships; there are other ways to keep fit.
Where should I save my emergency fund?
You need a solution that is accessible and flexible so you can withdraw when you need it. Our new savings plan allows you to access your money whenever you need it with no hidden fees or penalties. Our savings solution has a favorable interest rate so that your money can grow, and we provide the tools to track your progress. Check it out and let’s get you started.