Your car breaks, you start having health issues, that job turns into that former job: Nobody’s road is bump-free. Those bumps usually cost money, and they can really throw you off track. Most adults understand the importance of saving for a rainy day, but in the real world, saving money isn’t always easy.
Surveys routinely show that most adults have no money tucked away for emergencies. When (not if!) an emergency strikes and there isn’t enough cash in savings to cover the bill, the only way to pay is with more debt. The truth is, having an emergency fund beats the pants off buying a ton of nice things you don’t actually need — and it’s an absolute necessity.
But exactly how much do you need to save into an emergency fund, and what do you do with that money? Here’s what you need to know.
How Much You Should Save
Good: At a minimum, you should have three months of living expenses in your emergency fund. This means if you need R30, 000 a month to cover your basic needs like your bond or rent, utilities and food, then you need R90, 000 in your emergency fund.
Better: If you have people who depend on you financially, like children or a spouse, your emergency fund should be six months’ worth of living expenses, at a minimum. In addition, if you work in a career that has high turnover or a high injury rate, you’ll want to have double the amount of emergency fund as someone who works in a tenured career where layoffs rarely occur.
Best: As you get better at saving, work toward accumulating 12 months of living expenses in a savings account. Part of a balanced wealth portfolio is having liquid assets left over for emergencies or opportunities.
How Do You Do It
I’m sure you’re wondering where to get the cash to beef up your emergency fund. After all, depending on your situation, coming up with surplus funds to fund this ambition may seem like a joke and not at all in the realm of possibility. Thankfully, there are a few practical ways you can get the ball rolling:
- Create a monthly budget.When you tell your money what to do and account for every Rand, you find more of it. That’s because a budget enables you to save before you spend.
- Say no to new debt.Rack up more interest on your credit card or take on a new car payment, and you’re parting ways with the very Rands you could use to build your emergency fund. Make debt your enemy because . . . well, it is.
- Sell something or a whole lot of somethings.Clear your clutter by posting unused items on sites like OLX, Gumtree or the Classifieds. If your neighbourhood permits, try hosting a good old-fashioned yard sale.
- Temporarily cut your expenses.Ask yourself: What can I do without? Consider any memberships or subscription services like the gym, Dstv, Netflix or magazines. Cut back on eating out or go to the movies less. Add this newfound extra money to the emergency fund line in your budget.
Where Do I Save It
When deciding where to invest your emergency fund, we suggest using a money market fund. Money market funds are superior to savings accounts in that they can offer higher yields. You can invest in a money market fund via an investment manager or at your bank, then access your money through web-based account management or at an ATM.
Since money market accounts are easy to use and your funds can be withdrawn at any time, they can be a good option for your emergency savings. However, be mindful of money market fees that could chip away at your returns. As with any other account, it pays to shop around and compare fees and features before selecting where to keep your emergency fund.
When planning for an emergency fund, it’s important to be realistic with your target and the allocated time-frame to achieve that target. Your emergency fund doesn’t have to start of being a large, unattainable amount; it can start small based on your lifestyle. Important to also note is that an emergency fund, is not used for planned purchases like a house, a new car, a tertiary education, and so on.
Having an emergency fund gives you the peace of mind to know that should something truly awful happen, such as losing your job, you can worry about how to deal with the emergency itself and not worry about how you’re going to survive financially.