Life is full of uncertainties and that is why it is important to have an emergency fund saved up for those unplanned events that require immediate funds – for example a medical emergency, or a problem with your car or house that needs to be fixed straight away.
While many reports show that the majority of people are not saving, or do not have money for emergencies, it is known to be a key part of achieving financial security. Here we list some of the main benefits of an emergency fund.
1. Earns interest
One of the major benefits is that an emergency fund can gain interest if you just leave it to do its thing. The more money you have in the account, the more interest it will earn. When opening an account for this purpose, it’s important to opt for an easily accessible one. There are many available options, so make sure it’s an account that earns valuable interest, but more importantly, one you can access quickly should you need to.
2. It helps prevent debt
The many bumps in the road that come along in life can cost you lots of money, and if you aren’t expecting it, then it can be a big blow to your financial security. No one wants to take on debt if it can be avoided, which is why an emergency fund is so beneficial. You can avoid taking out a loan or paying with credit, both of which can cost you big on interest.
3. Gives you peace of mind
Knowing you have money set aside for emergencies reduces financial stress and provides reassurance that you are covered should any unforeseen expenses arise. Relieving this stress can benefit many other areas of your life too. The pros of an emergency fund go further than just money in the bank, it also adds to your overall wellbeing.
4. Protects you in case of job loss
In the current uncertain economic environment in South Africa, many people are unsure about their job security. With enough to cover three to six months’ worth of expenses saved up, an emergency fund can provide a much-needed financial buffer should you be retrenched. If you work in an industry that is experiencing a lot of changes, it might be a good idea to save the equivalent of six months’ worth of expenses to ensure you are covered, in case it takes longer to find another position.
5. Protects your ‘future self’
What is debt, really? It’s borrowing money from your future self. For example, without an emergency fund, you may be forced to take out a loan or access your retirement fund. A loan will charge you a lot of interest before you’re able to pay it back and if you borrow out of your retirement fund, it interrupts the process of accumulating interest.
6. Allows you to maintain your property
If you are a homeowner you will know that costly house repairs can set you back a considerable amount. If you are wanting to sell your house and need to fix it up, or there is suddenly a crack in the pool or the electricity goes haywire, your emergency fund has your back. While your insurance will cover some costs, such as a burst geyser, the ongoing maintenance costs and upkeep are at your expense.
7. Teaches you discipline
Putting money away each month is habit-forming and helps to instil the discipline of saving, so don’t let that slide. Once you have built up your emergency fund to the appropriate amount, you can rechannel that money into something else, such as investments or paying off debts.
The information contained in this article is for information purposes only and does not constitute professional advice.
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