You have most likely heard about emergency funds and any wise person who has your best interest at heart will tell you how important they are.
However, it may still be a slightly foreign concept to you. Perhaps you don’t know enough about them, or maybe you are wondering how to start an emergency fund when you are already struggling to save for your long-term goals.
Either way, an emergency fund will be what saves you from that inevitable rainy day. To be honest, we don’t believe in negative thinking but based on our experience, the rainy-day scenario is a likely one and we should always be fully prepared for it.
Also known as a contingency fund, this is the capital that is saved in an easy to access vehicle and is used as a safety net for potential unexpected expenses.
Ideally, your emergency fund should have enough money in it to cover a minimum of three times your monthly expenses.
This helps you sustain yourself while covering your costs for a three-month period if you cannot earn an income for some reason.
Although it’s good to aim big, often the only way to reach your biggest goals is to take one small, strategic step at a time. There is no way to leap from where you are, straight to where you wish to be.
Decide how many months’ worth of expenses you want to save and break that down into bite-size pieces. For example, start by saving towards R2500 within a certain time frame, and once you have reached that amount set yourself a new goal to work with, also within a certain time frame. Before you know it, you would have saved enough to reach your final goal.
The single most important thing to remember is that you want your emergency fund to be free and accessible if and when you need it.
This usually means that the compounding interest rate will be quite low and that’s okay for now. However, you may still want to find an account with the highest possible interest rate for this purpose.
Additionally, it’s good practice to keep your emergency funds with a different bank to your main bank account. Doing this minimises the temptation to access your emergency fund for non-emergency situations.
It is often quite difficult to commit to putting money into your emergency fund every single month, especially when it feels like you are not enjoying immediate benefits or returns from doing so.
Therefore, it is always a good idea to automate your savings. This means setting up a stop order from your main account into your emergency account every month so that it’s just a normal part of your monthly deductions from your account.
Adjusting your monthly budget to accommodate your emergency fund savings will also help you adjust your spending habits accordingly.
Once you finally reach your long-term emergency fund goal, carry on saving. You can never have too much money saved for that rainy day we spoke about.
There are so many things that can change overnight and having a big enough safety net to keep us going through hard times may be the difference between us staying safe until we can get back on our feet or losing everything we have worked so hard for.
If you tap into your emergency fund for any reason at all, it’s important to always put back what you have used and then some.
This is crucial to make sure that you do not gradually deplete your emergency fund over time. Discipline will be your biggest ally in this regard.
By starting an emergency fund, you are giving yourself the safety and security of knowing that if something unexpected happens, that you will be financially prepared for the knock.
Our financial advisors in Johannesburg can help you set up and build an emergency fund which forms part of your greater personal financial planning picture. Please contact us for more information.
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