What is an emergency fund?
Wouldn’t it feel great to have some money to fall back on when you get thrown into a financial emergency? Having a savings plan will give you peace of mind when faced with a major life crisis. That ‘savings plan’ is an emergency fund. Building an emergency fund is a very important step in your financial wellness. To do it properly, you need to understand the basics. We break it down for you below:
What is an emergency fund?
In simple terms, it is money you’ve set aside to be able to pay for life’s unexpected events without getting into debt. These emergencies could include fixing your car, a medical bill or urgent home renovations, even unexpected school costs.
Why you need an emergency fund
There’s two important reasons for getting an emergency savings fund started. Firstly, an emergency fund will help you avoid getting into debt. Secondly, the extra money will help to pay for any unexpected expenses. You’ll never know what’s going to happen and you don’t want to be at the mercy of all the possibilities. Your emergency fund will come in handy if you suddenly lose your job, for example.
Where to keep your emergency savings
An emergency can come when you’re least expecting it, so your emergency fund should be easily accessible. A savings account is a good place to start. That way, your money will earn interest and you can access it as and when you need it. Looking for the best bank to save money? African Bank offers a Notice Deposit investment account that allows you to earn interest from day one of opening it. With this Investment you can grow your money with extra deposits from as little as R100. You can then decide on your notice of withdrawal; either 7, 32 or 90 days.
Your emergency fund should be in a separate bank account from the one you use daily. In this way, you will not be tempted to use the money for needs that aren’t critical.
How much you should save
Your emergency fund savings should be big enough to cover 3 to 6 months of your living expenses. That will help you get through the first few months of a job loss or medical set-back.
Financial experts advise that you go a step further by building up an emergency fund that covers 6 to 12 months of expenses. This extra protection will come in handy if multiple bad events were to happen at the same time.
3 Tips to build an emergency fund
- Set a monthly savings goal
When deciding on how to save money, it helps to have a goal in mind. To achieve that goal, you need to look at your income and your expenses and see how much money you can afford to save every month. Then, you need to commit to an amount you’re going to put into your emergency fund.
- Start budgeting
This is an important step in ensuring that you have enough money to meet your monthly savings goal. As you compare your monthly income and expenses, have a look at your receipts and bank statements. This will show you where your money leaks are and where you can cut back on some expenses. In-turn, this will free up some of your money, allowing you to save in an emergency fund.
- Set up a savings account
Shop for a savings account that will earn interest at the best possible rate. Remember that you need an account that can/will allow you easy and quick access to the money in an emergency. Remember to compare apples with apples when searching. (Read more on how to compare interest rates)
As time goes by, you might be able to save even more! If you get a promotion at work, why not allocate more cash to your savings?! Be sure to look over your budget for new ways to tighten the purse strings and boost the amount you’re saving for emergencies.