When you’re living from pay cheque to pay cheque, the idea of saving for a rainy day can seem like a pipe dream. But if there’s one thing we know for sure it’s that there’ll always be a rainy day.
When the unexpected happens, we need to ensure it’s not financially ruinous, says Simon Brown, founder of trading and investment education platform Just One Lap.
“Even a small, unexpected bill could see us having to go to a loan shark or sell assets or investments.” “You also need an emergency fund to carry you in the event of losing your income,” says Gugu Sidaki, director and wealth manager at Wealth Creed.
Three reasons you need it
- You’ll avoid getting into more debt
Yes, you probably already have debt, but if you don’t have an emergency fund and an unexpected expense comes up, you’ll get into more debt because there’s no other way to pay for the emergency.
- It’s a buffer if you lose your job or have an irregular income
The state of the economy means retrenchment and job losses are on the rise. An emergency fund gives you some protection if you happen to lose your income or have cash-flow problems as a contract worker or freelancer.
- You live far from family
The cost of travel at short notice to see family in case of illness, a medical emergency or a funeral can be substantial.
How much should you save?
The rule of thumb is to have the equivalent of three months’ salary in an emergency fund. Old Mutual’s head of financial education, John Manyike, says while everyone’s circumstances are different, it’s a good idea to save enough to be able to afford being unemployed for six months.
“With that being said, any amount of money you put away will do some good in the long run and when you need it most,” he adds. People with a stable career should aim for the equivalent of three months’ expenses as well as having other capital available, according to Warren Ingram, executive director at financial services company Galileo Capital.
The best saving vehicles
When an emergency strikes, you want to be able to access your funds as soon as possible. “Products like a money market fund and savings accounts are ideal as they provide good liquidity,” Sidaki says.
An emergency fund should ideally be kept in low-risk investment avenues such as a unit trust to avoid depreciation in value, Ingram says. “If you have an access bond on your home, you can also pay extra into the bond and use this as your emergency fund,” he adds.
This has the added benefit of reducing the interest you pay on your bond, which saves you money. Manyike says tax-free savings accounts, 32-day notice accounts and stokvels are also good options.