(By Schalk Louw, financial advisor at PSG Wealth)
We are currently facing unprecedented levels of uncertainty…
While many people have lost their jobs, there are also countless others that are still employed, but due to current circumstances, they are either only earning a fraction of their usual salary, or no salary at all.
For any former doubters, the need for an emergency savings fund is now crystal clear.
The primary purpose of an emergency fund is to cover your expenses for a period of at least six months in case of your retrenchment, dismissal, or any other situation that can prevent you from earning an income.
How are these funds usually invested?
“Rainy day” savings are usually kept in a savings account, or in a money market-linked account at a bank. It is imperative that these funds are protected against market volatility, and they should (preferably) be available at short notice, which makes the above-mentioned products ideal for this purpose.
While a fixed deposit account or a notice deposit account may offer you a higher interest rate, these products are not necessarily the best vehicle to use for your emergency fund. The funds won’t be accessible on short notice, without paying additional penalties.
Do your homework before choosing the right product, and be sure to compare the same type of product from various banks or investment companies, before you decide.
How can you replenish your funds if they’ve started to run out?
The first step towards replenishing your savings, should be to compile a comprehensive budget to monitor your spending habits.
Once you’ve established what your monthly expenses are, as well as where you can cut back on your spending, you should allocate as much as possible towards your savings. And no, there is no minimum amount. You should just start and commit yourself to a savings habit.
Saving, whether you’re just starting with your emergency fund or replenishing it, or for any other financial goal such as retirement, should be a disciplined process.
Set aside a fixed amount or percentage of your income each month, based on your budget, in an appropriate savings vehicle and be sure to reassess your financial situation regularly to ensure that you make adequate provision for your financial goals.
Saving should be key part of your financial PLAN
A savings account or emergency fund shouldn’t be seen as an investment that you simply dump whatever’s left of your income into at the end of each month. It should form part of a well-structured financial plan.
Being disciplined and making consistent contributions via debit order or by setting up a regular withdrawal from your online banking profile, is the best way to achieve your goal.
How do I get started?
An emergency fund needs to be monitored and revised on a regular basis to ensure that it keeps up with your circumstances, and stays that way.
1. Put together a comprehensive budget
The first and most important step, is to compile a comprehensive budget outlining your monthly income and expenses. Once you can see your expenses on paper, you will be able to calculate how much you will need in your emergency fund.
Also consider price increases. If you are starting with this process relatively late in the year, remember that medical aid contributions and electricity costs, for example, increase annually, and also that your municipal accounts may vary from month to month.
2. Identify savings streams
The next step is to determine how you will be funding your emergency fund.
- If you already have the capital available, the process is relatively simple in that you invest it in the product you have chosen.
- If you don’t have the capital readily available, you will have to work this into your budget through regular contributions.
Of course you can transfer any surplus you might have at the end of the month to your emergency fund as well to get to your initial target quicker, but only as long as such contributions are made in addition to your fixed monthly contributions, and they are not the primary source of funding for your emergency fund.
To conclude, saving is a lot like a good diet: maintaining good health involves sacrificing certain treats over the short term, so you can enjoy the benefits of good health over the longer term.