Building an emergency savings fund
The past year has shown us the absolute unpredictability of life, and the importance of prioritising your emergency savings. The truth is we live in uncertain times in an uncertain economy, especially in the wake of the coronavirus. The primary purpose of an emergency fund is to cover your expenses for a period of at least six months in case of your retrenchment, dismissal or any other situation that may prevent you from earning an income.
Putting the global pandemic aside, it could be that your car requires repair, your water geyser bursts or you need to pay unexpected medical bills. These are all situations in which having an emergency fund can make all the difference. Having a pot of cash to fall back on when “life happens” means you won’t have to rely on credit or rack up debt to resolve your situation.
The easiest way to build your emergency savings is to make saving money part of your budget. Make it a goal to save a certain percentage of your pay. This fund shouldn’t be an investment into which you simply dump whatever’s left of your income at the end of the month. Rather set up a debit order or a regular withdrawal from your bank account if you can, so that a fixed amount can be allocated to your emergency fund every month.
How much is enough?
Financial planners generally advise that your emergency savings goal should be to have between three and six months of your essential living expenses in emergency savings. This estimate is fundamentally based on how much you need at a minimum to pay for your food, housing and core utilities. Your emergency savings solely focuses on your “must-haves,” which are essential to your life and survival. Remember, you should ideally treat your emergency savings fund like any other recurring bill you pay each month.
What are the options?
Traditional saving options from banks — such as money market funds and high-interest savings accounts — are two good places to park your emergency fund. You need safe, liquid options so that your money is accessible in times of need. Whichever option you choose should have an interest rate that matches or beats inflation, is relatively easy to access without too much of a wait in an emergency, and is linked to a transactional account.
Other available options include stokvels or savings club accounts. Just as some people exercise more when they have a gym buddy, others find it easier to save when they do it in a group. For the spender who is constantly cashing in their savings, a stokvel or group savings club could be the answer.
Unit trusts give savings club members a number of benefits, including exposure to different types of assets and flexibility. Savings clubs can access their money in a unit trust investment at any time, there are no fixed or minimum investment periods and you won’t pay any penalties when you withdraw.
It’s important that an emergency fund forms part of a comprehensive financial plan: it’s an investment goal in its own right, and shouldn’t be confused or combined with any other investment saving goals, such as saving for an overseas holiday, your retirement or a new car. However urgent those purchases might seem, you’ll be grateful for your self-restraint when a genuine emergency arises and you’ve got a financial cushion to fall back on.
So, you think you can’t save?
For anyone who’s been discouraged from saving because they believe that they don’t have enough willpower, that they don’t earn enough, or that millennials will never be financially secure because they order too much takeaway coffee and avocado toast, there’s no time like the present to forget everything you think you know about financial planning. Take time to set some money goals and face up to your finances, rather than fearing them.
Deal with your debt first
Not only does the interest on debt tend to grow faster than the interest you’ll earn on your savings, but the time and energy it takes to manage your debt detracts from the resources you could be using to plan your successful financial future. Tackle one debt at a time: pay off your smallest debts first so that you can eliminate as many accounts as possible. Remember, most South Africans have debt, and some debt has its benefits in that it helps you to build a good credit record — but it should not be allowed to grow out of control.
Know your strengths – and weaknesses
Do you start strong by putting away a chunk of your salary on payday, then give it all up and splash out on something lavish halfway through the month? Or are you the type of person who just doesn’t know where their money goes, but suspects it may have something to do with all of those receipts for little treats, such as office snacks and after-work drinks? Knowing what it is that’s standing in the way of your ability to save might require some brutal honesty, but it will help in the long run.
If you’re feeling like your spending is a little out of control, it may be time to keep a money diary, whether in the form of a physical notebook in which you record every purchase, or an app such as 22seven that helps to categorise all of your purchases and show the areas in which you’re spending the most money. Consider what types of bank accounts and other savings products would support you best.
Money is a more sensitive topic than we tend to realise — and it often ends up being tied to our sense of self-worth. Having someone else to keep you accountable in what’s usually a private matter could help. Consider options such as a savings club with other people whose financial circumstances and goals are similar to your own, and investigate the options for pooling your resources. A financial planner can also prove to be an invaluable investment .
Don’t deprive yourself
Take time to think about what you’re willing to sacrifice, and what you’re not: if walking a short distance to work rather than taking an Uber is a safe option and leaves you feeling energised for the day ahead, go for it — but if a takeaway coffee improves your mood and makes you feel good about supporting a small business, that might not be the thing to cut out of your budget.
Do some maths around what some of your regular purchases are worth to you. Spending a bit more on a well-made item that will last for years is often a worthwhile investment, not a treat. Paying for a service when you could do it yourself might feel lazy, but may end up saving you money in the long term: if you’re likely to spend hours making alterations that someone else could do in minutes, rather enlist the help of a professional.
Dream big, but start small
Whether you’ve saving for a specific purchase or a rainy day, remember that you’ve got to start somewhere. Don’t wait until you can afford to put aside a large sum every month: even amounts so small that they seem silly to save will eventually add up. Yes, the younger you start saving the better — but whatever age you are, there’s no better time to begin than right now.