Just when everything seems to be going smoothly; a random pothole ruins your tyres (and your day). A storm exposes a leaking roof. Or an unexpected medical procedure is required. Even more familiar to many, a pandemic strikes and you’re being retrenched. These are not things one can fully anticipate - they just catch us off guard. We are often unprepared to bear the cost of covering the sudden expense. Instead, we find ourselves trying to remember all the people who owe us money, turning handbags inside out or even taking out loans.
In these situations, we wish we had money stashed away somewhere. But that shouldn’t be a fantasy. What you’re hoping for is a financial safety net that will help you cover unexpected expenses, namely, an Emergency Fund. I used to make sure my savings were enough to buy a return flight from Cape Town to Johannesburg, just in case something happened at home that required me to be there. This was my uninformed version of an Emergency Fund. When the pandemic hit, I soon realised that that was nowhere near enough to have saved. So allow me to share some of the key things to note when building an Emergency Fund:
How much should you have in your Emergency Fund?
An Emergency Fund should at least be enough to cover 3-6 months of your minimum expenses. So that's rent, water, electricity, groceries, medication, petrol etc. This may seem like a significant amount of money, but given the uncertainty of the world we live in, you may realise that it is just enough money to get you by until you’re back on your feet. Compared to how much you need for 20-30 years of retirement, 6 months' worth of expenses is not that much.
How to get started?
It is daunting to try and save so much money in a short period of time. But if you set yourself small goals that build up to your larger goal, it becomes more manageable. Maybe start by trying to save for just 1 month worth of expenses. Reaching that first goal can motivate you to keep going. Then set a target of 2 months' worth of expenses - before you know it, your Emergency Fund will be set up. You want to make sure you’re saving in a high-interest-bearing account that has minimal risk, such as the Allan Gray Money Market Fund.
Synonymous with ‘emergency’ is ‘urgent’ so you must ensure that your Emergency Fund is in an account that allows you to access your money quickly - not in a 32-day notice account. In light of this urgency, we have introduced a ‘Quick Withdrawal’ option for smaller withdrawals of R1000 or less. This allows our customers (for a small fee) to receive their money in just 1-2 business days as opposed to regular withdrawals that can take 2-5 business days.
Saving for doomsday isn't as fun as saving for a holiday. But if you don’t have some sort of Emergency Fund set up, building one should be your priority. A holiday can wait but that burst geyser can’t.