Reasons to have an Emergency Fund
Personal finance focuses on a range of categories - income, spending, saving, investing and protection. The focus of this blog will be on protection. Financial protection can come in a number of ways - car insurance, medical aid, funeral cover, life insurance, you name it. But one form of protection that many people overlook is an Emergency Fund.
An emergency fund is an amount of savings that you only access in the event of an unpredictable life situation. Originally it was recommended that an emergency fund should be a savings amount equal to 3 months of your total take-home pay. For example, if you earn R15,000 every month, ideally your emeregcny fund should have R45,000 in it. However, 3 months may not be enough as we saw with the Covid-19 pandemic, that stretched people’s finances thin for more than 3 months, even after the tight lockdown. Therefore it would be in your best interest to save an amount that equals to up to 6 to 12 months of your income.
Real Situations in which emergency funds could have helped people:
Covid pandemic -
people lost their jobs and the absence of emergency funds meant they could not pay their rent or pay school fees
Kwa-Zulu Natal floods -
people lost their homes and got sick and the absence of emergency funds meant they could not fix damages or pay for medical bills
people who are not able to find new jobs and are over-indebted. The absence of an emergency fund means they cannot keep up with their escalating debt
Unexpected death in fmaily -
people who do not have a funeral cover and the absence of an emergency fund makes it difficult to cover all the burial costs, and/or to pay off remaining taxes/debt of the one who passed
According to FNB, these are reasons why you should save for an emergency:
- To continue servicing your debt and avoid legal repercussion that might affect your family should you lose your income generating ability
- To avoid over indebtedness and reduce additional debt exposure
- To provide your family with security in times of emergencies
Accounts that you can look into for saving:
Notice Deposit Investment Account
Money Market Account
Tax-Free Savings Account
Speak to your bank or financial advisor on what the best product for you will be. Also compare with other banks on withdrawal conditions, interest rates, investment goals, etc. It’s important to note that when you are given an interest rate, compare it to the rate of inflation. You want your savings to grow over inflation and not below it.
Life is unpredictable and anything can happen at any given moment. Setting up an emergency account for you and your family allows you to get by each day with less weight on your shoulders knowing that should anything unexpected happen, you are financially protected. You can start by making a budget that allows you to save a portion of your income before you pay for any expenses. Write your goals down next to your budget so that you know exactly why you are saving that money and the value that you will be receiving from this investment not just financially but holistically as well.