Anything can happen in life. You cannot be prepared for everything, but there are measures which you can take for resolving some cash emergencies.
You can deal with cash emergencies with the help of an emergency fund. It is a fairly simple yet highly effective solution.
Why and How to Build an Emergency Fund
There are all kinds of financial emergencies that virtually any person in South Africa can face. The list of the most common ones includes loss of income, high medical bills and urgent car or home repairs.
If you are forced to take out a loan in such a situation, you will certainly have no room for negotiation when it comes to interest rate and fees.
As a result, you can get into more serious financial trouble.
How much should you keep for unexpected cash emergencies?
The majority of experts recommend that your fund should be equal to your living expenses for three to six months. When you determine the actual amount of money to keep for emergencies, you have to take into account the size of your family and whether you have kids, your debt and the insurance policies which you have.
Experts suggest that you calculate the size of the emergency fund based on your living expenses because the most common emergency is considered to be unexpected loss of income. In case you lose your job, you will still have to pay all the bills. The loss of income is perhaps the most serious thing which can happen.
If you are prepared for the biggest emergency, you will be fully ready to deal with smaller ones such as a broken home appliance.
No savings, now what?
If you have no savings which to transfer to your emergency fund straight away, you should not worry.
You will get a long way if you start small. You can determine a fixed amount of money to set aside every month depending on your income and spending. You can also plan to allocate bonuses and other extra payments to your fund.
It will take time to build a fund equal to your expenses for three to six months, but if you set small milestones, you will be on the right track.
The first step which you need to take is to open a savings account in your bank, if you do not have one at present. Next you have to start depositing the sum which you have decided to set aside every month. Generally, you can make weekly or bi-weekly payments as well if this will be easier and more convenient for you. The important thing is to be disciplined and to turn the depositing of the fixed sum into a habit.
Once you are comfortable with the initial amount of money which you have decided to save, you can increase it. If you start off with R100 per month and you no longer miss this amount of cash in your wallet, you can increase the size of the sum which you set aside to R150.
After a while, you can move on to R200 and so on.
Where to keep your emergency fund?
A savings account is the best option because it is cheap and allows you to withdraw cash quickly and without hassle. As you accumulate more savings, you can consider an account which brings higher interest so that you can make extra money.
Other options include certificates of deposit and money market accounts.
The former are quite secure, but there are penalties for withdrawals while the latter give you the opportunity to earn more but at a higher risk of loss.
The best thing to do is to keep your emergency fund fairly liquid. Basically, you should be able to withdraw the required cash when you need it. Similarly, you would not want to use your savings to invest in high-risk high-return financial instruments such as stocks and mutual funds.
Keep your savings safe for an emergency and set aside money for investing in another account.