Debt is the only option if you don’t have an emergency fund.
I have just had one of those months where I’m wondering which of my ancestors or gods I’ve offended. You know those months were anything and everything seems to go wrong and all of it involves spending money unexpectedly?
It started with my dog ingesting poison, resulting in two days in emergency care. The vet bill came to R7 000. Then the fridge broke down for the third time in a year and we realised repairing it again was throwing good money after bad so we had to buy a new fridge/freezer – our household was down another R11 000.
In an attempt to get fit I injured my ankle at gym and required surgery. Between the hospital, surgeon and anaesthetist, the bill came to R30 000.
And then two weeks later, we awoke on Saturday morning to discover water pouring from our ceiling as a pipe to the solar geyser had burst. We are still waiting for the quotes, but to replace pipes and the ceiling I estimate around R10 000.
This all in the space of three weeks – so in just 21 days our household had been hit with R58 000 of unexpected expenses.
There is only one line of defence against this onslaught and that is emergency savings and insurance – fortunately we have both.
While having insurance is an important first defence against life’s large, unexpected expenses, there is always a gap between what insurance pays out and what you need to cover. That is when your emergency fund kicks in. This is why, when people ask me my number one money rule, I always answer “make sure you have an emergency fund”.
- Our pet insurance covered R6 000 of my dog’s vet bill leaving us with R1 000 to fund.
- I had to fork out R6 500 of the R30 000 hospital bill
- Our household insurance will take care of the ceiling but our excess is R3 000
So while insurance covered R42 500 of the unexpected expenses, we still had to pay out R15 500 – again remember that this is R15 500 we have not budgeted for. That is a lot of money, certainly more than we can cover from our monthly income. Without our emergency fund, we would have had to put this on credit and spend the next year paying it off at 20% interest.
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.
Start by targeting an emergency fund of R10 000 before you start accelerating your debt repayments. Then, once your short-term debt is settled, use bonuses and other financial windfalls to slowly build that emergency fund up to three months’ worth of expenses.
This article first appeared in City Press.