13 May 2020
The Covid-19 emergency has revealed how important saving for emergencies is. The pandemic has affected the financial standing of business and the ordinary man’s ability to generate an income. It is now more important than ever to start putting money aside for a rainy day.
An emergency fund can be easily described as money saved for unexpected, usually unavoidable and costly expenses such as:
An emergency fund creates a financial safeguard at a time of need. With enough savings in place, you will have enough to cover your emergency needs without needing to rely on high interest bearing credit products such as loans and credit cards. When in need, an emergency fund helps you to avoid borrowing.
More benefits of having an emergency fund include:
The question of how much to save, is not an easy one to answer as it depends on your lifestyle, monthly costs, income and dependants. A good rule of thumb is that you should save at least three (3) of your monthly salary. For example, if you become unemployed, the emergency fund money could be used to pay for your normal living expenses such as rent, monthly car instalment and electricity while you are in search for a new job.
Determine how much you need to save: Linked to the above point, you will need to find out how much your monthly expenses are in order to determine how much that equates to over a three or six-month period;
Do not become overwhelmed: A three-month salary or living expenses for the same period might sound big especially if your budget is already tight. There is no pressure, you can start small;
Keep the small change: When you get change from the store, put some in a jar or piggy bank at home. Small change accumulates over time. When your jar fills up, move this into a savings account and start over;
Automatically save money every month: Link your emergency fund savings account to your bank account. This will make it easy for you to make automatic transfers every month when you receive your salary;
Save your tax refund or annual bonus: If you are expecting a tax refund or a bonus this year, plan to use it to increase your emergency fund savings. You can save all or part thereof by transferring it into your emergency fund savings account;
Assess and re-assess your contributions: Your contributions can be varied depending on any new developments regarding your finances, for example, a promotion and an event that caused you to dip into your emergency fund. Depending on the assessment you may choose to either increase, decrease or keep your contributions the same.
Some key considerations are necessary before you decide on the type of account to put your money into:
The Assupol One Tax-free Savings Policy allows our clients to save an affordable amount every month (from R300 per month), with education and emergency access to funds at any time. The product also includes the Assupol One Bonus that rewards clients for disciplined saving and not making unnecessary withdrawals. It is important to speak to your financial adviser to assist you in determining a suitable product for you.
Once you have reached your savings goal, stay focused on how you spend those funds. Remember, you started saving for emergencies so be sure to use your savings for those emergency needs.