You cannot understate the importance of having an emergency fund. As its name states, an emergency fund is an amount of money that you sets aside for unforeseen circumstances that might result in you losing your means of income, or a situation that requires you to spend more money than you normally do at once. Emergencies might include losing or leaving your job, a sick parent, repairs to the house required when your teenage son drives the car through the wall teaching himself how to drive or falling sick just when your insurance cover expires.The most common emergencies are usually medical or losing/leaving your job. However, the thing about emergencies is that they are unforeseen, so the general idea is to have a sum of money somewhere easily accessible when and if needed.
How much money should one keep aside?
The actual amount that one should set aside varies. A good rule of thumb is to have between 3 and 6 months of your basic living expenses in the fund. One thing to note as you set up your emergency fund is that when you do need to tap into it, your lifestyle may need to undergo drastic cut-backs to prevent you from blowing the fund. This means that you may be forced to cut down on the daily Java cup or the “two for the road”. Other factors that influence how much you should set aside include:
- Do you have health insurance? If you or your employer caters to your medical bills, then it may not be necessary to keep an excessively large fund. However, keep in mind that with losing/leaving your job, your former employer may withdraw the benefit and you should anticipate this.
- What do you for a living? If you work in a field that has constant demand for your expertise for your skills, such as medicine or pharmacy, then your “between jobs” provision need not be as large as that of a say, bank teller with a basic B.A. degree
- Do you have dependents? A 20 something year old living in a SQ in South B would definitely have a much smaller emergencyfund than a parent of 3.
Where should the money be kept?
There are several places you can keep your emergency funds:
- High yield Savings accounts. These are accounts that pay relatively high interest rates on the monies saved with commercial banks. They have limitations on the withdrawals which prevents one from tapping into them to replenish the weekend beer fund.
- Money market fund: You can park your money in a money market fund with one of the local fund managers such as Old Mutual or African Alliance. These offer a better place to keep your money as the interest rates are
While not exactly emergency funds, there are other options that can come in handy when one is in a fix:
- Credit card: Although greatly feared, credit cards have their benefits. They can come in handy, for instance, should you be taken sick in the middle of the night and cannot access your funds till the next business day or have to wait for that cheque issued by the fund manager to clear.
- Pension plans/life policies: Most personal pension plans and life policies allow their holders to borrow a certain percentage of the paid up premiums at low interest rate.
How does one get started with saving up an emergency fund?
The most basic rule to any personal financial success is this: Pay yourself first. Just as it should be the mantra with investment, it is of more importance to set aside money for an emergency fund than anything else. What to do if you do not have one?
- Figure out how much you would need to live for 3 months without being extravagant or drastically changing your life style.
- Establish a reasonable period within which you want to have set-up your emergency fund. Most people can comfortably do this in 6 – 12 months. If you have a great chunk of disposable income, for instance, if you live at home with your parents, or have finished paying off your mortgage, then you can dedicate a shorter period of time to hit the target, or raise the target to a larger amount.As long as you do not have an emergency fund, you should be ready to set aside certain luxuries until you have the fund in place. You’ll find that the JD goes down easier when you have the fund in place.
- Identify the vehicle that you will use for your savings, e.g. a high yield account, a basic savings account or a money market fund. A combination of all three can also be used so as to vary the ease of access to your funds and the return on yoursavings.
- This is probably the most important part: Set up a standing order with your bank to transfer the cash every month, immediately your salary/cash checks in. This is before your rent, bills or anything else. If you have the discipline, or your income is irregular, you should deposit that money into the emergency pool before anything.
- If you are consistent, you should be able to see your emergency fund grow till you hit the target.
- Once you have hit the 3 month target, rinse and repeat.