What if… ? You suddenly lose your ‘safe’ job, your car stops running and needs unexpected and costly repairs, or you have to pay a hefty sum for medical expenses because your or a loved one’s health has taken a turn for the worse?
In a life-altering event having a safety net, in the form of a well-planned emergency fund, will mean the difference between ‘getting out of a hairy situation’ and a bottomless pit of incurred debt.
Don't wait for ‘the shit to hit the fan’..
If you already have an emergency fund in place, congratulations on your forward-thinking initiative and on having the right attitude about security and where money, savings and other financial products fit into the picture. If you don’t have such a fund yet but you’re thinking about setting one up, hopefully the ‘black Sunday’ is still far enough in the future. Many people, however, wait until disaster strikes before learning the value of having an emergency fund and realising that they should have started saving towards such a fund long before they needed the funds. In the event that you really have hit bottom, you can apply for an quick loan from a credit provider, BUT only in an urgent situation - if you can, you should avoid this option.
The very first thing to do when you want to engage in any kind of financial planning, is to involve a suitably qualified financial advisor or planner to give you advice and to guide you. These individuals have expert knowledge on all matters financial and, as setting up an emergency fund is likely to form part of a bigger financial plan to provide security for yourself and/or your family, engaging a qualified individual will give you a holistic view of an emergency fund and where it fits into your overall financial strategy.
Below are a few general remarks on an emergency fund, what it is meant for and broad guidelines on how to select an account in which to deposit your emergency fund. There are also some facts around amounts for such a fund and where to start. All these facts are meant to guide your thoughts and to form the basis of an in-depth discussion about finances, including an emergency fund, with a qualified financial advisor or planner.
How much should I save?
The size of an emergency fund depends on your individual circumstances and how much you need (all your living expenses combined), but most experts agree that as a minimum, an emergency fund should consist of an amount equal to three to six months’ living expenses. Be realistic when calculating how much you will need monthly, and remember to include annual increases, as well as an annual salary increase (if you would have been eligible for one). A family will need a bigger emergency fund than a single person, while someone with a substantial amount in outstanding debt will have to take this into consideration as well when planning for and setting up an emergency fund.
Don't dig into it, unless it's really an emergency
It is important to distinguish an emergency fund from an ordinary savings account that is used to ‘save’ for that costly item that you desire. An emergency fund should be untouchable, yet you should be able to access the funds when you need it. This means that you should not be able to withdraw any money from it before you absolutely need it to pay for that life-altering event. At the same time, you should be able to access the funds at relatively short notice. You would also want to consider the interest your money will earn while in the account. Carefully consider all of these factors when deciding which type of account to use for your emergency fund, as it will be unwise to invest money but not have access to it within a reasonable time when disaster strikes.
Know the Terms
Another factor to consider when deciding on the type of account for your emergency fund is whether to keep the account at the same financial institution than your current account, or not. When you need the money within a day or two, it is important to consider that a ‘lead time’ might apply when transferring funds from an account held at one financial institution to one held at another. Transfer limits might also come into play, so as indicated above, careful research and the guidance of a professional is needed before making a final decision on which account is the right fit for your needs.
As is the case with almost all financial investments, time is critical when seeking optimal growth of your investment and the earlier you start, the better off you will be when disaster strikes. Very few, if any salaried employees are fortunate and able to pay a lump sum equal to three to six months’ living expenses into an emergency fund. Your personal circumstances will determine how much you can contribute to your emergency fund and at what intervals in order to get to the amount that you need, but it is important to include an amount for this in your budget.
Stick to your monthly deposits
Make it easy to honour your commitment by authorising your bank to debit your chosen amount from your current account into your chosen ‘emergency fund account’ and try to deposit some extra funds into the account whenever you can. Whatever your three to six months’ expenses amount to, that is the amount you will need, so make sure you also provide for service/administration fees. If you have started with a small amount, consider increasing the contributions at regular intervals.
You have your emergency fund, you contribute regularly, your money is earning some interest and you are satisfied that sufficient funds will be available relatively quickly when you need it most. Don’t become complacent, thinking you have adequately provided for an emergency and that you can default on any proactive measures you would have taken to ward off an emergency. Keep up any payments towards medical insurance, go for your regular check-ups and make sure your car is maintained at the intervals as prescribed by the manufacturer. You have your safety net, but prevention is still better than cure!
When embarking on any financial planning, including setting up an emergency fund, always consult a qualified financial advisor or planner, who will give you advice to suit your unique circumstances and financial needs.