Life is full of unexpected incidents, mishaps, and opportunities. Very often, these unexpected situations (whether they bring joy, pain or frustration) come with a price tag. This is why having an emergency fund is so important.
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You might suddenly find yourself with the opportunity to go on your dream holiday for a much lower price – but you would still need some extra cash to pay your way. Maybe you’ve discovered that you’re having another baby. It could also be that you’ve lost your job, received an unexpected medical bill, or need to pay for urgent car repairs.
The point is, having money set aside can prevent you from going into debt. The question is, how much should you save to ensure you’re adequately protected?
Let’s explore the best practices for building an emergency fund and how to tailor it to your circumstances.
Step 1. How Much You Should Save
It would be great if we could provide you with an exact number, however, as, you may imagine the amount needed will vary depending on personal factors.
That said, financial experts typically recommend saving three to six months’ worth of essential living expenses. It’s also been suggested that if your income is irregular or you have dependents, you may want to aim closer to six or even nine months’ worth of savings.
The thinking is that this general amount will help give you an adequate cushion so that if there is an emergency, you’ll have enough funds to cover your rent or bond, groceries, water and lights, and other critical costs.
Now, to calculate your emergency fund amount, you will need to sit down and work out what you consider to be your essential monthly expenses. Then it’s simply a matter of calculating the total amount so that you can multiply it by a minimum of three and a maximum of six.
For example, if your essential expenses come to R20,000, you should aim to save between R60,000 and R120,000.
Step 2. How Much To Start Saving Monthly
Saving such a large amount can feel daunting, so take comfort from knowing that there are no financial experts who would ever dream of suggesting that you immediately save huge chunks to establish your fund in the quickest timeframe as possible.
In actual fact, it’s recommended that you start small and build over time. Firstly, you need to examine your budget so that you can see how much you can afford to set aside for your emergency fund. Only once you’ve done this, can you set a manageable goal.
Rather start with a smaller goal of saving towards R2,000 and then gradually increase the amount to R5,000 and then more. A good idea would be to automate the transfers to your emergency fund each month as this can help you achieve consistent progress without requiring extra effort.
Step 3. Choose Where To Keep Your Emergency Fund
For starters, you should consider keeping your emergency fund savings separate from your main bank account. It can be so tempting to dip into this money for non-essential spending. Thankfully, many banks in South Africa offer dedicated savings accounts that allow easy access in emergencies.
When looking for a separate account, keep in mind that accessibility is crucial. You need to be able to withdraw money quickly, whenever you need to, without penalties. This is a good time to chat to a financial advisor, however we can say that, generally, a high-interest savings account or money market account is ideal because it offers liquidity while still earning some interest.
Step 4. When You Should Rebuild Or Adjust
Your emergency fund isn’t a one-and-done project. After all, it’s likely that you’ll need to dip into it and so it makes sense that there will come a time when you’ll need to rebuild your fund. Added to that, your lifestyle and financial needs may change, which may require you to review your savings goals. For example, if you buy a new home and have bigger bond repayments then your emergency fund should grow to accommodate this bigger expense.
Feeling informed?
Having an emergency fund is by far one of the most financially responsible actions to take. While it might appear to be something for those who are “well off,” an emergency fund is something that everyone can (and should) build. The fact is that everyone needs a buffer against life’s unexpected expenses. While building one can take time, these steps will help get you started.
Don’t forget that AA Inform is home to a range of useful financial tools and resources that can assist you along the way, including access our Monthly Personal Budget Calculator.
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