An emergency fund turns a crisis into an inconvenience

Could this be truer?

During the last two years of the coronavirus pandemic we faced unprecedented levels of uncertainty. Whilst many people have lost their jobs, there are also countless others that are still employed, however due to current circumstances, they are either earning a reduced percentage of their usual salary, or sometimes no salary at all.

Now, as the health crisis seemingly wanes, it’s apparent that fewer of us were prepared for the monetary ramifications of the pandemic and the need for an emergency savings fund is now crystal clear. Are you feeling the same?

The purpose of an emergency fund and how much to save?

The purpose of an emergency fund is to primarily ensure that you cover your living expenses for a period of at least six months in the event of your retrenchment, job loss, health concerns, or any other situation that can prevent you from earning an income.

In other words, it is a fund established for the purpose of ensuring that your expenses such as rent, utilities and necessities are covered for a certain period, until such time as you can return to your full income generating capability.

The general “rule of thumb” is that you should have three to six months of expenses, however the exact amount is based on individual preference and circumstances.

How are these funds invested?

Since the funds are required on short notice, liquidity is important therefore cash is usually saved in a savings account, or in a money market-linked account at a bank. It is imperative that these funds are protected against market fluctuations and volatility, and they should ideally be available on demand, therefore the bank type of accounts are most suited for this purpose. Growth is earned in the form of interest and your capital is protected against market volatility. It is important to note that interest rates differ between different banks and between different products.

Whilst a fixed deposit account or a notice deposit account may offer you a higher return or interest rate, it may not be the best options to use for an emergency fund. The funds will not be accessible on short notice, without incurring additional penalties and costs. Before making a decision on what is the most suited or best product be sure to compare the same type of product from various banking institutions or investment companies.

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 changing circumstances and remains that way. Probably the first and most important step, is to compile a comprehensive budget outlining your monthly income and expenses. This will also give you an indication of your spending habits and will help you to cut back on unnecessary spending.

A budget according to Dave Ramsey “is telling the money where to go, instead of wondering where it went” because once you itemize your expenses on paper, you will be guided on how much you will need in your emergency fund.

Other factors to bear in mind are inflationary price increases if you are starting with this process relatively late in the year. Escalations like rent, medical aid contributions might increase on an annual basis and the utilities or municipal accounts may vary or fluctuate from month to month.

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 of your choice. If you do not have the capital readily available, you will have to set aside an amount in your budget through regular contributions.

The regular contribution can be done by setting up a monthly debit order or scheduled payment from your bank account so that a fixed amount can be allocated to your emergency fund every month. This creates a savings habit. Initially start with below what you think is comfortable — like, really easy — and of course, you can transfer any surplus you might have at the end of the month to your emergency fund. This will help you get to your goal or 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.

Once you have successfully set up an emergency fund it’s advisable to do a regular financial “Health Check” on your funds. What feelings come up when you think of the saving levels you managed to achieve? How much anxiety did you feel when you looked at the balance? Is it adequate to support you in an emergency? Asking these questions can help you decide whether your finances are in good shape, or do you need to create a bigger cushion. You might even decide you’ve got enough set aside for a true emergency, and can divert some money to another short-term or longterm savings goal.

An emergency fund is an investment goal so it should be part of your financial plan.

An emergency fund is an investment goal in itself and need not be confused or combined with any other investment saving goals, such as saving for an overseas holiday, retirement, a new home or car. If you feel overwhelmed, or cannot identify any room for saving towards an emergency fund in your current budget, it is always recommended to consult a professional to assist you in assessing your financial situation holistically and comprehensively.

I am curiously wondering how many of your emergency funds were shattered as a result of the pandemic and how many of you were financially shattered because you had no emergency fund?