More and more people are living pay cheque to pay cheque, but what happens in the case of an emergency? Only 30% of South Africans are saving for an emergency according to new data from the Old Mutual Savings and Investment Monitor, which is based on 1000 South African households living in metropolitan areas. Also, according to a Budget Insurance survey, only 19% of South Africans have enough to survive for three months in the event of job loss.
So what are the benefits of an emergency fund?
You Don’t Need to Go into Debt
An emergency fund can help you to stay out of debt. When you don’t have an emergency fund, you will have to borrow money in order to pay for an emergency whether its car repairs, to replace a broken appliance or an unforeseen vet bill. When you have a nest egg available then you can avoid borrowing money to pay for an emergency.
Protect Yourself in the Event of Job Loss
Job losses and retrenchments are on the rise in South Africa and if you lose your income then an emergency fund can provide you with much needed protection. If you work in a highly volatile industry, then you may want to increase the size of your emergency fund.
Irregular Income Buffer
If you are a freelancer, a contract worker or starting your own business then you can use an emergency fund as a financial buffer for times when your income becomes irregular or until you are able to build up regular cash flow.
Your Home Costs Money
If you are a homeowner then you will be faced with ongoing maintenance and repairs, which can expensive. Your short-term insurance may cover some costs like damage caused by a burst geyser, for instance, but the ongoing cost of upkeep and ongoing maintenance you will need to pay.
Medical Aid Doesn’t Pay for Everything
Even having a comprehensive medical aid can leave you with shortfalls that you will need to pay. Some procedures that come with a co-payment or a shortfall and your emergency fund can help to cover these costs.
Avoid Dipping into Your Future
When you are faced with an emergency, you might be left with no choice but to access your retirement fund, which is never a good idea. Taking money from your retirement fund interrupts the process of compound interest and will affect your retirement plan.
Travel with Short Notice
Families are now scattered all over the globe and there could be a time where you will need to travel internationally at short notice. International travel is not cheap when you add up the costs of visas, flights and more, but you can cover these costs with your emergency fund.
Your Emergency Fund Earns Interest
Having your emergency fund in an account that has an interest rate that matches or beats inflation will ensure that your money doesn’t lose value. Have a look around for an account that has favourable interest rates and offers easy access.
Get into the Habit
Putting money away each month is a good habit to have and once you have built an adequate emergency fund, you can use that money you put away each month towards something else like boosting investments or paying off debt.
Being worried about money can put you under stress, but knowing that you have an emergency fund tucked away will give you peace of mind and reduce your financial stress.
It takes time to build up an emergency fund, however setting aside any amount no matter how small can help you in the long run. It is advisable to have an emergency fund that is equal to at least three months’ salary.
Open a separate savings account with a good interest rate that allows you to access your money when you need it and build your emergency fund to your desired level.