The savings journey: Building a savings buffer in an uncertain world
I always say that you cannot get out of debt until you have a savings buffer or emergency fund in place – simply because it’s that fund that will stop you from increasing your debt.
Topping the list of reasons why you should have such a fund, is the peace of mind this savings buffer provides. Think about the following: When the COVID-19 pandemic struck and our country went into lockdown, how would you have felt if you had three months of your expenses sitting in an emergency fund? Slightly less worried, not so?
Most financial plans are derailed by unexpected expenses which is why, even if you are trying to pay off debt, you need to make that emergency fund your first financial priority– because no matter how well you plan, life happens. Your child may require an unexpected medical procedure with the hospital asking for a co-payment; you may be asked to pay for the funeral of a family member who didn’t have a funeral plan or get paid late working as a freelancer or only a portion of your salary due to the impact of the pandemic.
These are just some of the events that can catch you by surprise, and if you don’t have an emergency fund, it is easy to turn to personal loans, credit cards and overdraft facilities. While these may provide a short-term solution, the long-term effects are costly. Just knowing that you have money set aside will help you sleep more soundly at night.
How to build an emergency fund
- To save for an emergency fund, you need to set a goal for yourself: how much do you wish to accumulate in the fund? Then come up with an action plan. You can save a fixed amount every month; whether this is R500 or R5 000, let it be an amount that works for your budget.
- If you are a freelancer or earn on commission, perhaps a more practical approach would be to save a percentage of your income
- One of the quickest ways to beef up your emergency fund is through a cash windfall; you could save a percentage of your bonus or even your annual tax refund.
- The best, and probably the most efficient way to ensure that you do save for an emergency fund, is to automate your savings. This could mean setting up a monthly debit order until you reach your emergency fund goal.
What kind of account to use for an emergency fund?
- An emergency fund is simply another form of a savings account. It is money set aside for future consumption, that is readily available. An emergency can happen at any time; therefore, the fund needs to be liquid, meaning it should be accessible with little to no risk of losing money, and without expensive penalties. I suggest you open either a 7 or 32-day notice or a money market fund account, all of which you can access immediately. Just ensure that the chosen bank account provides you with an interest rate that’s on par with CPI, or even better yet, one that beats inflation. Don’t be afraid to shop around to see which bank offers you the best interest rate.
- An alternative to saving in a bank or money market account is to deposit your savings into your access bond if you own a property. By putting extra money into your bond, the interest you pay on the bond is reduced, but the access facility means that the excess funds are available for you to withdraw should an emergency arise.
An emergency fund does not only provide a financial buffer against life’s unexpected events, but also prevents you from falling deeper into the debt-trap.
Having an emergency fund allows you to plan for the future without being scared of what might happen. It puts you back in the driver’s seat knowing that if a financially demanding event happens, you and your family are covered.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.