You wouldn't drive a car without putting your safety belt on first. Even if you have never been in an accident, even if you consider yourself a highly-skilled driver, you understand that anything could happen. Putting on a safety belt is a small, but invaluable investment in your safety. And you've heard the horror stories of people who carelessly thought they could do without it.
Life can be just as unpredictable. It is said that the only constant in life is change, and while we accept that anything could happen, too many people undertake the journey of life without putting their safety belt on. If the Coronavirus pandemic has taught us anything, it's that a small investment in your financial safety can have big implications for your quality of life.
That safety belt is an emergency fund.
What is an emergency fund?
This is a pool of money that helps you to cushion the impact of a financial emergency. Typically, it is a savings account, kept separate from your day-to-day banking account so that you aren't tempted to spend it, to which you will add money every month. An emergency fund will help you to take care of things like:
- A leak in your geyser
- Replacing your car tyres
- A medical procedure not covered by your medical aid
- Living expenses if you are retrenched
What are the benefits of an emergency fund?
An emergency fund is a great tool for keeping your debt under control. Many people will turn to loans or credit cards to take care of emergencies. While this is sometimes unavoidable, an emergency fund will absorb some of the costs involved and keep your debt to manageable levels.
Another benefit is that it will help you to reach your financial goals. Your best-laid plans can easily be derailed by an emergency. Having a financial buffer in place will make it easier to stick to your budget and realise your plans.
How do I set up an emergency fund?
Step 1: Set a goal
Decide on the size of your emergency fund. Take a look at your living expenses and calculate how much you would need to cover your basics in the event that you lost your job. A good range of cover would incorporate between three to six months of living expenses. That should give you a good idea of how much money you will need for an effective emergency fund, and how long it will take to build up the necessary funds.
Step 2: Draw up a budget
A good budget is the foundation of any financial plan. Subtract your living expenses from your earnings and then set aside of portion of your money for a monthly contribution to your emergency fund. This may necessitate cost-cutting in certain areas, but the peace of mind that comes with having an emergency fund is well worth the sacrifice.
Step 3: Choose a savings account
Now that you know how much you want to save each month, the next step is finding the best possible home for your money. What you want is a savings account, which allows you access to your money at a moment's notice for emergencies. You will also want the highest possible interest rate, so that the money you store there will grow and add to your financial muscle. Do some research, and shop around for the best offer. African Bank's MyWORLD bank account offers the highest savings interest rate, and the lowest banking fees. Find out more here.
Step 4: Automate your savings
Committing to monthly savings isn't always easy. There are many obligations and temptations competing for your money, ready to distract you from your plan. One of the best ways to overcome this is by automating your savings. This means that the money is automatically transferred into your savings account each month, before you get the chance to spend it. It's like a debit order for your very own insurance plan.
Step 5: Boost your savings
The positive vibes that wash over us whenever we get an extra bit of money, also make it easier of us to spend it. Say you received a bonus or an inheritance. How do you put something away for a rainy day, when all you now want to do is make it rain?
The answer is: you can do both. Putting some of your windfall into your emergency fund will allow you to reach your goal quicker, and there should still be plenty over for a good time.
Or even more savings. That's the thing with setting up a savings account. Once you start to see how much money you can save, and how it will grow, you start to see other possibilities. All of a sudden, that holiday you always dreamed about looks like it could become a reality.