If there’s one thing about life as an adult, it is expensive. You are paying bills even while asleep. Considering the unemployment rate in South Africa, the unsettled economy and constantly fluctuating interest rate, building an emergency fund is necessary to ensure financial stability.
WHAT IS AN EMERGENCY FUND?
An emergency fund, also known as a contingency fund, is money you set aside as a financial safety net for any unexpected turns of life or expenses. Building an emergency fund is key to ensure financial stability if you lose your primary source of income.
Life is uncertain and you may never know when you could be retrenched, quit your job or be unable to continue your working duties. Therefore, setting money aside every month will be able to carry you for a few months of expenses in case of the worst.
Bills, debt and basic living expenses, unfortunately do not just stop if you no longer able to earn an income. For most, losing their job is one of the biggest fears as many people have rent or a bond, a car and other living expenses to cater to each month.
Sadly, most times after paying bills and taking care of your basic needs, there is often much left over. So, how do you build an emergency fund?
FIVE TIPS TO BUILDING AN EMERGENCY FUND
1. SET A TARGET AMOUNT
The first step is to calculate how much money you need in a month to survive. This will be all your bills + living expenses such as groceries, fuels etc. You then need to aim to have at least three times that amount in your emergency fund.
Ideally, having six months upwards would be your best bet, but we all need t start somewhere.
2. OPEN A SEPERATE SAVINGS ACCOUNT – CONSIDER A 32 DAY OR TAX-FREE SAVINGS
Whenever you are trying to save, for anything, you need to ensure it is done in a seperate account. You cannot mix your savings and spending money, because you will start to spend your savings thinking you have more than you actually do.
So an emergency fund should also be kept separate from your regular savings as this is designed for an emergency, and not a new sneaker.
While you may need your “emergency” fund to be easy access, it is also a good option to consider a 32-day account or tax- free savings. In the event of a real emergency, you will still be able to access the money quickly, at a fee unfornutarly.
However, a 32-day account or tax-free savings will allow you to earn interest on your savings each month. This can assist you on reaching your goal quicker and once you do, you will just have extra savings.
3. CREATE A MONTHLY DEBIT ORDER FOR A MINIMUM AMOUNT
Once you have created a savings account, set aside a minimum amount you are willing to pay every month into your account. This can start with as little as R200 that will be debited from your main account every month into your designated savings account.
4. SET SMALLER SAVINGS GOALS INSTEAD OF ONE BIG AMOUNT
Instead of stressing yourself out by trying to save your entire target amount, rather break down the amount into several smaller amounts. An easy way to do this is try one of the viral savings challenges where you put in a little at a time, but it all adds up to a targeted-larger amount.
5. DO NOT TAP INTO THE EMERGENCY FUND IS THERE IS NO EMERGENCY
As mentioned above, the emergency fund is for emergencies only. As you see your hard work pay off into some good cash, you may be tempted to take some out to spend on recreational activities, travel or shopping. You need to train your mind not to fall into the trap and stay disciplined with your savings.