Setting up an emergency fund

Watch Episode 3 of the Change In your Pocket series for advice on setting up an emergency fund.

– Video supplied by BrightRock

Welcome to The Change Exchange, where we’re helping you find ways to make the most of out of your paycheque.

The first thing you need to do with that paycheque is to start an emergency fund. Your emergency fund is what stops you going into debt when a crisis hits.

This emergency fund will protect you from those day-to-day emergency expenses such as a burst geyser, a broken-down car or medical bills. An emergency fund is also there for that big, once-in-a lifetime crisis – losing your job.

A few years ago a reader wrote to me after he had just started his first job on contract, wanting advice on how best to manage his money. Our recommendation to him was to prioritise an emergency fund. Eighteen months later he sent me an email to say that his contract had not been renewed but that he was doing fine, because of his emergency money. He was able to take his time finding a new job, and the amazing thing is, he’s got a better job with a better salary, because he wasn’t under such financial strain that he had to take the first job that came his way.

Your first step is to have R1 000 and then build up to R10 000. You can do this by setting up a debit order that pays into your emergency fund each month. You should even put your emergency fund ahead of accelerating your debt repayments. While this may sound counter-intuitive, many financial plans aimed at getting you out of debt are derailed because of crises and unexpected emergency expenses. Only once you have R10 000 in your emergency fund should you start tackling your debts. Once you’ve settled your debts, then you can starts the longer goal of having at least three to six months of your monthly expenses put aside. Use bonuses, 13th cheques and any other cash windfall to boost your emergency savings. If you ever have to draw down on your emergency fund, make it a priority to repay that money before you spend or save anywhere else.

An emergency fund needs to be readily available, but it also needs to be one step away from your bank account so you’re not tempted to spend it. There are three things you need for emergency savings:

  • Relatively easy, but not immediate, access to the money
  • A reasonable interest rate
  • No fees

All five major banks in South Africa offer products that are suitable for emergency savings. If your current bank has a reasonable product, it’s best to keep your emergency fund with the same bank, as the money can be transferred within 24 hours into your transactional account should you need it. Sit down with a consultant at your bank and find out which product offers the best balance between interest rate and flexibility for your specific needs.

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