By Wilma Bedford
With the recent and still ubiquitous Covid-19 crisis that has caused the biggest economic slump since the Great Depression of 1933, many people are grateful for an emergency fund that currently carries them through, but many were caught unawares and regret not having made provision. Many individuals’ financial position was of such a nature that providing for an emergency fund was just not possible, and in good times one does not contemplate job losses, medical expenses or pandemics. If you are fortunate enough to be earning an income, you should put an emergency fund in place.
Why is an emergency fund essential? It prevents you from setting aside your long-term financial plan (such as pension, annuities) or, even worse, incurring expensive debt like borrowing against a credit card to cover the crisis. In unforeseen circumstances and without an emergency fund you may be tempted to liquidate your long-term tax-free investments or annuities. If you do so, you will sell your shares at a lower price, usually a penalty clause is attached to the reclaiming of fixed investments and it will be difficult to catch up what you have lost.
What is an emergency fund for? It is a buffer against contingencies such as a geyser that bursts, big repairs to your car, an unexpected medical account or to carry you if you have lost your job, until you can once again generate an income. It is not for luxurious holidays or to augment a deposit on a home or a car. If you want to use some of the fund, you have to put it back as soon as possible. Don’t hide behind the false security that you have insurance cover for contingencies; your insurance might lodge a dispute against your claim or take a long while to compensate you.
How much should be in my emergency fund? Ask yourself how much you need per month and save until you have three to six months’ salary in your fund. You must have enough in this fund to give you time to recover from the crisis.
How do I begin and manage an emergency fund? Begin saving with so much as you can by signing a debit order for an amount you can presently afford. These funds must go into a separate account so that you won’t be tempted to use some of it. Place it in a short-term investment such as a Money Market or similar type of fund that will preserve your capital, offer a reasonable interest rate, is readily accessible and available without a big withdrawal penalty or administration fee. Be aware that most savings accounts offer a very low interest rate that does not keep abreast with inflation. Set yourself a feasible savings goal and ensure that the account grows by signing a debit order to that account against your salary. Begin your emergency fund while also paying off other debts; in this way you establish a savings culture for yourself and have something to fall back on should the unforeseen occur. Re-evaluate your lifestyle and cut back on unnecessary expenditure. If you have some loose notes sitting around in your back pocket, put that in your emergency fund.
Do you have an emergency fund?
Noluyolo, B. July 2020 Allan Gray. https://www.allangray.com
What is an Emergency Fund and How Can I Set One Up?
Wessels, K. Sanlam Indie.