We all dream of having an emergency cash stash, but for many it stays just that – a dream. But, the truth is if your car needs major repairs or you are laid off at work, a financial buffer could keep you afloat and give you the space to get back on your feet without going into debt. If you are barely scraping by from month to month, then an emergency savings fund is particularly important and should be your number one savings priority.
What is an emergency fund?
It’s cash you have saved to help you continue your normal life through any emergency that you might experience. You shouldn’t touch these emergency savings. The money just sits, earning interest, until you actually need it.
Sound like something you need in your life? We think so… here are a few simple tips to get you going.
1. Draw up a simple budget of monthly income and expenses
If you don’t already have a budget, you might find it easier to download a simple budgeting app to help you get started. Track your spending, including fixed recurring monthly expenses and changing costs like eating out, movie tickets and clothing. Once you have a clear idea of how much you are spending vs how much you earn, you can set a figure to put into your emergency fund each month.
2. How big should your emergency savings fund be?
This depends on your personal circumstances, but ideally an emergency fund should cover three to six month’s living expenses. This might seem like an insurmountable amount to save, but just by putting aside R500 a week, for example, you have R2 000 in a month. Pack lunch for work instead of eating out, car pool, stick to a leaner grocery shopping list, check your bank statements closely and cut any unnecessary expenses – these are just some of the ways you can save that R500 a week.
3. Create a plan to start your emergency savings
So, you have a goal, you know how much you want in your emergency savings account, and now you just have to work out how you are going to get there. Set measureable, realistic targets – for example, set a goal for 6 months and commit to putting any extra money you might receive into the emergency fund for a set period.
4. Where should you put your emergency cash stash?
An emergency can happen at any time, so you need to have easy, quick access to the cash. A separate savings account, or a savings pocket attached to your account both provide easy access and are immediately retrievable. Just don’t be tempted to dip in!
5. Remember – stick to your savings plan!
For many, this is the hardest part. If your goal is unattainable it will be easy to give up, but if you’ve followed the above steps and stick to the plan, your emergency money will grow. Consider having the money taken off as a debit order each month so you don’t even have to think about it.
6. Emergency account vs rainy-day fund
For many, these are the same thing, but it’s wise to make a distinction between the two. A rainy-day fund can be used to cover the cost of broken appliances, a visit to the doctor or last-minute travel. However, an emergency fund is for life’s more catastrophic events, like if you suddenly find yourself out of work, or get sick and have unexpected medical bills.
Putting money away for an unexpected, may-not-happen emergency might not feel like the most exciting thing to be saving for, but an unexpected expense can send you spiralling into debt. Don’t wait until it’s too late – we can’t always be prepared for the hand life deals us, but we can be prepared for the bills that come along with it.
The information contained in this document is for informational purposes only and does not constitute professional advice.