As you prepare to invest, it’s important to set aside some money—about the equivalent of 3 to 6 months’ of living expenses—in an emergency fund.
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What’s an emergency fund?
An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly.
You can also tap into your emergency fund during a family emergency or when your pet needs medical care.
Here are six reasons why you need an emergency fund:
1. Unforeseen Medical Expenses
An emergency fund can help you afford an unexpected medical emergency. Even if you have health insurance, your coverage may not cover all of the costs of a medical treatment you need.
2. Job Loss
An emergency fund is there to help you get through a dip in income without doing long-lasting damage to your finances or going into debt. For example, your emergency savings can help you cover your necessary expenses for a few months while you find a new job.
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3. Unexpected Home Repairs
Tapping into your emergency fund can help you cover urgent home repairs, such as a broken home appliance, a damaged roof, a failed heating system or a burst pipe.
4. Car Maintenance and Repairs
If your car breaks down or if you get into an accident, the unexpected car repairs can get expensive fast.
5. Urgent Pet Care
If your furry friend has a medical emergency and needs expensive pet care, finding funds to cover vet visits, treatments or surgeries can be taxing, even if you have pet insurance.
6. Family Emergencies
When a loved one is seriously ill or is expected to pass on soon, you won’t usually have the time or flexibility to pick the cheapest flight dates or find a discounted hotel stay.
How much should you have saved?
Most experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months’ worth of living expenses.
Start by estimating your costs for critical expenses, such as:
- Housing.
- Food.
- Health care (including insurance).
- Utilities.
- Transportation.
- Personal expenses.
- Debt.
You don’t need to include expenses for anything you’d cut from your budget in the event of a job loss or major catastrophe. For example:
- Entertainment.
- Dining out.
- Nonessential shopping.
- Vacations.
- Savings for a second home, college, or other goals.
Putting aside 3 to 6 months’ worth of expenses is a good rule of thumb, but sometimes it’s not enough. If you’re able, you might want to think about expanding your emergency savings.
Where should you keep your emergency savings?
The best place for your emergency fund is in a liquid (easily accessible) account. A liquid account might be a regular savings account at a bank that provides some return on your deposit, and from which your funds can still be withdrawn at any time without penalty.
Money market funds can be a great place to hold your emergency savings because they’re safe and accessible. One of the best platform to use is franc app. It allows you to put your money in Allan Grey’s money market fund.
It is advisable to set up a debit order each month to your emergency fund until you have reached the desired level.
By putting extra money into your bond, you are not only saving for a rainy day but also reducing the interest you pay on your bond, which saves you more money.
How to Build an Emergency Fund
Building up those emergency savings will give you so much peace of mind. Here’s how to do it:
Make a budget
A budget doesn’t tell you what you can’t do—it shows you what you can do. So, list out all your monthly income and any expenses. When you’re making your budget, you’ll be able to see how much money you have available so you can be ready to jump into the next step.
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Set a monthly savings goal
This is how much you want to set aside each month to continue building up your emergency fund.
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Adjust how much you save
As time goes by, look over your budget for new ways to tighten the purse strings and up the amount you’re saving.
Quick Ways to Start Your Emergency Fund
- Sell things you don’t need.
- Start a side business. Find ways to increase your income such as having a part-time job.
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When Should I Use My Emergency Fund?
Sure, your emergency fund is technically your money. But once you’ve designated it for emergencies, you owe it to yourself to spend it only when it’s absolutely necessary.
Here are three questions to ask yourself to see if you need to tap into your emergency savings:
- Is it unexpected?
- Is it necessary?
- Is it urgent?
Should I pay off debt or build an emergency fund?
If you are in the process of paying off high-interest loans or credit cards, be sure to balance your desire to accumulate an emergency fund with your need to get out of debt.
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It’s important to save for emergencies, but every day that you’re still in debt is costing you money. What you’re saving in one account could end up being cancelled out by the interest you’re being charged in the other.
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Instead, you may want to set a more modest emergency fund goal at the start and put any additional amount you can toward your debt. Once that’s retired, you can accelerate your emergency fund savings and raise that goal. In the meantime, having a small cushion is better than having no cushion at all.
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While you can’t ever fully prepare for emergencies, planning now is the best way to ensure you can handle unforeseen challenges. Setting up an emergency fund takes times, especially if you have just embarked on your career. However, even setting aside R50 a month will help you in the long run.
Free Course: How To Build An Emergency Fund
