Sometimes things go wrong. That is why people take out cover for their cars, homes and health in order to minimise the blow should the unthinkable happen. Unfortunately in everyday life there are often unforeseen expenses like car repairs, medical bills etc. that you cannot insure against. For these and any other emergency fees, you need an Emergency Fund.
If you don’t have an Emergency Fund, starting one could seem confusing and extremely daunting. But don’t worry. Here are five tips that could help you get started.
1. Your Emergency Fund will prevent you from making new debt.
If there is a voice deep inside you saying: “You don’t really need an Emergency Fund, that’s what your credit card is there for”, the voice is wrong. Sure a credit card can help you put new tyres on your car this month but what if you cannot pay it off fast enough, or a second tragedy hits? You will start accumulating debt and find yourself in a bad financial position very quickly.
An Emergency Fund is necessary so that you can:
- Have a financial safety net
- Get peace of mind
- Maintain your lifestyle even when the going gets tough, and
- Prevent making new debt.
2. Your emergency fund should be accessible and safe.
So you have a few hundred rands to put towards your emergency fund…where will you put the funds? An Emergency Fund must be accessible to you on a whim and it must be safe.
Storing it in your safe at home is not really as safe as you may think. Investing your money in stocks and bonds makes access difficult, and you are open to risk. That’s why an interest bearing savings account is a great option.
Tip: If you are afraid you might dip into your Emergency Fund for luxuries because you see its balance every time you use your online banking… take out a savings account with another bank, and forget about this fund.
3. Your Emergency Fund should be able to cover three to six months’ of expenses.
How much is really enough? Many financial experts recommend an amount suitable to cover three to six months’ worth of expenses.
4. Build your emergency fund automatically.
Budgeting is difficult, and it becomes even more difficult paying an amount into a fund for a rainy day, especially if you can think of several things you would like to purchase with it now. Don’t tempt yourself. Let the funds be withdrawn from your account automatically at the beginning of the month along with all your other debit orders.
5. Set achievable goals for your emergency fund
Creating a strong emergency fund takes time. So before you become discouraged, rather set smaller, achievable goals. For example start saving R100 in month one, R200 in month two, R300 in month three, R400 in month four, R500 in month five and so on…Every month you will only need to put R100 more away than the previous month, which means you get used to the idea of having less money available to you slowly. And by the end of month 12 you could have a minimum of R7 800 safely tucked away for emergencies. Relook your budget again at the end of month 12 and see if there is a set amount you can continue to contribute to your fund, so that it continues to grow.
If you are too over indebted to save, contact Debt Rescue for debt counselling assistance on 0861 123 644, or fill out click here to fill out our free call-back form.