If you don't plan ahead, unforeseen expenses can land you in debt.
If you don’t plan ahead, unforeseen expenses can land you in debt.
Set up a special fund for emergencies so you have money available to pay for unforeseen expenses. This prevents you from going into debt when something goes wrong. But remember, it’s important to keep the money in an account where it’s quickly and easily accessible when you need it, says Marlene Budge of Sygnia Asset Management. Don’t for instance invest your emergency savings in a fixed-deposit account because it may take some time before the funds become available.
Your home loan can be a safe place for your emergency fund. If you pay more than the required monthly installment on your bond, you probably have prepaid funds in your home loan account. Homeowners with an access bond account can withdraw these funds when needed. If you don’t have an access bond you won’t be able to withdraw the extra money and use it for something else. Ask you bank how soon you can have access to the money should you need it.
Budge says savings accounts and money market funds offered by banks are good options for emergency funds. But don’t expect high growth. Because these investments are less risky, their growth rates are lower than those of high-risk investments such as shares. On the upside your investment is fairly safe and the chances of losing your money are slim. Money market funds should have better growth rates than ordinary savings accounts though. Remember, the returns are positive but too low to be a good long-term investment.
Many people believe you should set aside three to six months’ salary as an emergency fund. It may sound like a lot of money but don’t be disheartened by this, Budge says. Save whatever you can. It’s a good idea for instance to set up a debit order for your emergency fund, even if it’s only for R100 a month. This way the money goes into your savings account before you can spend it.
1. Should I save for an emergency fund or pay off my debts?
Try to pay off your high-interest, short term debts before saving for an emergency fund.
2. What about tax-free savings plans?
They provide better value over the long term. Your investment is also limited to R30 000 a year so if for instance you invest R30 000 and withdraw R5 000 for an emergency, you can’t invest R35 000 the following year to make up the shortfall.
3. Should I opt for a long-term money market fund?
No. Their growth rate doesn’t necessarily beat inflation so your savings lose buying power over the long term.
4. What else should I do?
Draw up a budget to get control over your finances. It’s a practical way to see how much money you have on hand to save.
5. Can I use my bonus?
Save as much of it, as you can use it for necessities such as repairing a leaking roof.
The so called sandwich generation – people with dependent parents and children – seldom have an emergency fund. Fifty-two percent say in the event of unforeseen expenses exceeding R10 000 they’d have to take out a loan, use their credit facilities or borrow money from friends or family.
Tip: Compare various banks’ fees and interest rates before deciding on a savings option for your emergency fund.