An emergency fund can act as a buffer against unexpected expenses that could blow a hole in your finances. It is a safety net that can be beneficial to financial planning for the unknown.
Having the right tools to save towards an emergency savings account can give you more room to breathe. Here is how you can work towards creating one.
Having an ultimate goal to save towards is beneficial, but never underestimate starting small. When faced with a financial situation where you have very little wiggle room in your budget, look at what you can cut back on. Consider setting aside an amount that you can consistently put into an emergency savings account and gradually work towards increasing the amount. The aim is to be consistent and to avoid not saving at all.
Not all accounts are created equal
We all want our money to work hard for us instead of the other way around. Therefore, researching the type of savings account that comes with the best interest rate and benefits to work for you is vital. An account that matches the inflation rate (6.5% or more), even if it is an investment account, will give you more value for money.
Creating an emergency savings fund means that it should be flexible and easy to access for emergencies. Some accounts could attract a fee for immediate withdrawals which is something to consider while other accounts will only give you access to your funds after a period of time. Carefully read what the terms of the conditions of your account are and ask questions if there is something that you do not understand.
How much should you set aside?
Each person’s situation will differ from the next when it comes to creating a financial safety net that will adequately protect us when we need it the most. An emergency fund should ideally have at least three times your monthly expenses saved. This might sound good on paper but can be a tight squeeze for many South Africans who are trying to get by each month. Seeking advice from a financial planner or advisor can assist with making realistic adjustments. It will also be beneficial to look at ways in which you can reduce your spending by using only 80% of your income to cover expenses.
Think of an emergency fund as a moving target
Having a goal is the first step. Understanding that an emergency fund is a moving target can help you adapt your finances accordingly and reduce any financial strain. Your income and expenses are bound to change, which means being able to adapt finances accordingly. Re-evaluating an emergency fund according to your needs can make it easier to make adjustments without being out of pocket. Always keep in mind that financial planning is a juggling act. Therefore, keep track and adjust where you need to according to your needs.