- It helps you stay out of debt: In the absence of easily accessible emergency funding, you may be left with no choice but to borrow money to pay for the emergency. Whether it is an unforeseen vet bill, a new tyre for your car or your fridge that stopped working, having a nest egg available to access will mean you can avoid borrowing to pay for the emergency.
- It protects you against job loss: With retrenchments and job losses on the rise in South Africa, an emergency fund can provide much-needed protection in the event of loss of income. If you are operating in a particularly volatile industry, you may want to consider increasing the size of your emergency funding.
- It provides a buffer against irregular income: If you are a contract worker, freelancer or starting your own business, an emergency fund can provide you with a financial buffer in times of irregular earnings or until you can build up regular cashflow.
- It helps to fund home repairs and maintenance: If you are a homeowner, you will inevitably be faced with ongoing repairs and maintenance, which can be expensive. While your short-term insurance will cover some of the costs, such as damage as a result of a burst geyser, the costs of ongoing preventative maintenance and upkeep will be for your expense.
- It assists with medical and dental shortfalls: Even a comprehensive medical aid can leave you with shortfalls that you need to pay for. Scans, scopes, x-rays, day clinic procedures, dental treatment and elective surgery can result in member co-payments or shortfalls, and emergency funding will help cover these bills and other costs associated with your treatment.
- It prevents you from borrowing from your future self: In the case of an emergency, you may be left with no choice but to access your retirement funding, which is never a good idea. Withdrawing from your retirement funds interrupts the process of compounding interest and will adversely affect your retirement plan.
- It allows you to travel at short notice: With many South Africa families and friends scattered all over the globe, there may come a time when you need to travel internationally at short notice. International travel can be very expensive, especially when applying for visas and bookings flights at short notice, and an emergency fund will ensure that these costs are not prohibitive.
- It earns your interest: Placing your money into an account with an interest rate that matches or beats inflation will ensure that your money does not lose value in real terms. Shop around for a vehicle, such as a money market fund, with favourable interest rates and ease-of-access.
- It teaches you discipline: Putting money away every month is habit-forming. Once you have built up an appropriate emergency fund, re-channel that premium towards something else such as paying off debt or boosting your investments.
- It provides peace of mind: Lack of emergency funding can keep you awake at night with worry. Knowing that you have a ‘rainy day’ fund tucked away can provide enormous peace of mind and reduce financial stress.
For most people, setting up an emergency fund takes times, especially if you have just embarked on your career. However, even setting aside R50 a month will help you in the long run. As a rule of thumb, it is advisable to keep the equivalent of three months’ salary in your emergency fund.
To set up your emergency fund, open a separate account with a reliable financial institution. Ensure that your money is housed in an account that is easily accessible, such as a transactional account or money market fund. Once again, be sure to put your money in an account with an interest rate that at least matches inflation otherwise your money will lose value. It is advisable to set up a debit order each month to your emergency fund until you have reached the desired level.
Another savings option for your emergency fund, if you are a homeowner, is to put away extra money into your bond each month. By putting extra money into your bond, you are not only saving for a rainy day but also reducing the interest you pay on your bond, which saves you more money. There are so many money market fund options available in the market place. However, your financial adviser will be able to guide you in terms of reputability, interest rates and accessibility of funds.
As Dave Ramsey is famous for saying: “Save three- to six-months expenses in a Rainy Day fund. Know why? Because it’s going to rain, and you aren’t the exception.”
Have a super weekend.
Sue
