No-one ever wants to have an emergency – much less the cost, expense, and the stress that one can bring.
Often, emergencies and unforeseen expenses strike when they’re least expected, and can complicate our daily lives and our budgets. While short-term credit can help you navigate an unforeseen expense and take back control, an equally powerful tool you can use is to develop – and use – your own ‘Emergency Fund’.
Sometimes also referred to as a ‘Rainy Day’ fund, an emergency fund is just that – an amount that you set aside, grow, and use should an event or circumstance jeopardise your cash flow.
Having an emergency fund gives you the flexibility to have cash-on-hand in the event of a crisis, and can help you navigate even the most stressful times in your life. In this in-depth guide, we’ll walk you through setting up your fund, and when you should use it.
We’ve also prepared a downloadable file that you can keep handy when starting your emergency fund to track your progress, and keep you motivated!
Use your budget
When starting an emergency fund, it’s vital to approach saving and storing your money just as you would with any other long-term saving project, or starting a new investment.
The first – and most important – step in both starting and growing your emergency fund is to use your monthly budget to gradually save up an amount over time. This means actively planning, and ensuring that you’re able to commit to saving consistent amounts of money each month – and avoid the temptation to use that money elsewhere!
Your first task in establishing an emergency fund will be to re-evaluate your cash flow; you’ll need to see how much money you have to spare each month, or where you can re-prioritise your expenses to enable you to gradually save up over time. Our easy-to-use budgeting template can help you get started.
When planning how you’ll create your emergency fund, consider setting up a monthly stop order on your banking account to keep yourself accountable – this way, you’ll be safe in the knowledge that your emergency fund will continue to grow each month.
Set your emergency savings goal
Now that you’ve successfully set up a plan to continuously save money each month, you’ll need to set your first savings goal.
Unlike other savings projects or investments, an emergency fund is unique as you’ll be able to set up your own goal; there’s no minimum deposit or starting balance needed to begin this project, except for whatever fees or requirements might be associated with the kind of account you choose to store your funds – we’ll touch more on this later.
For now, consider what your immediate needs are, and what emergencies you could face. For many people, the most difficult financial emergency is a sudden loss of income.
For that reason, a great idea is to set your savings goal to gradually save up to three months’ worth of your monthly gross salary – this way, should you suffer an unforeseen event that prevents you from working, you’ll have up to three months’ worth of money to enable you to get back on your feet.
Develop a savings plan
Keeping a consistent savings plan – rather than trying to save on an ad-hoc basis – can both assist you in growing your emergency fund with access to a preferable interest rate, as well as develop an accessible sum of money to use in the event of an emergency in the first instance.
While setting up a monthly stop order is a great method to build your savings over time, why not challenge yourself further? Our 52-week savings challenge is designed to help you save up to R14000 in one year, and can help you get a head start on building your fund!
Set continuous goals
While your initial goal should be in touch with your immediate needs, a worthwhile decision you can take is to continue growing your account into the future. Consider that over time, your needs are likely to change – and as you grow older, you’ll be more likely to have additional expenses, medical costs, or dependents to look after; meaning that your emergency fund will need to be in touch with these needs as well.
Setting a continuous saving goal can help keep you motivated; for example, if you initially set up your account to save and store three months’ worth of your gross salary, why not continue to save up half a year’s worth of income once you have met that goal?
Ensuring that your emergency fund grows alongside your needs is a great way to be prepared for any emergency, both now and into the near future.
Choose an account to store your emergency fund
The second most important decision you can make when setting up your emergency fund is where you should store your hard-saved cash. Unlike other investments, where you could easily ‘lock up’ your funds to guarantee a higher interest rate, the purpose of an emergency fund is to be accessible at all times – meaning that you’ll want to store it in an account that offers immediate access with a reasonable interest rate for growth.
Depending on the options your bank offers you, a great option may be to use a money market account – which offers instant transfer times to and from your current account, has a profitable interest rate which can cover your account fees, and usually offers standard bank transfer times to other accounts should you need to pay for a specific service or cost.
When choosing an account for your emergency fund, consider this order of priority:
- Accessibility (how quickly you can access your funds)
- Interest (how quickly will your fund grow over time?)
- Fees (how much will this account cost month-to-month?)
When should I use my emergency fund?
Arguably, the biggest challenge anyone can face when having an emergency fund is the choice of when to use it.
Often, we can be tempted to use your emergency fund to solve a short-term cash flow issue or use it either to splurge on an impulse purchase or set up another investment.
Define what counts as an ‘emergency’
When you start your emergency fund, consider writing down a list of criteria that you believe will ‘count’ as an emergency. This can include a loss of employment, illness, a motor vehicle accident or maintenance issue in your own home, or any other form of financial stress that you may experience.
Having this list – and considering whether your present emergency qualifies as what you’ve put down counts as an ‘emergency’, can help you actively decide whether you need to put your newly-established fund to good use.
If the time comes to use your emergency fund – that’s ok! You’ve done the hard work of setting up a saved amount of cash in the event of a ‘rainy day’, and this is the occasion when this money is meant to be spent. Just as you’ve saved this amount up over time, you’ll be able to restart your fund for use in the future once again.
Consider what insurance you might already have
One important asset you may have when facing an emergency is insurance – whether that means medical aid, health insurance, or motor vehicle or asset insurance. This means that you may already be paying for coverage on an item that could, should it stop working or suffer illness or difficulty, jeopardise your cash flow.
When creating your list of what counts as an ‘emergency’, consider what active insurance policies and benefits you already have. This can assist you in knowing which events you have insurance coverage for, and which events you may need to use your emergency fund to assist with.
Read more from our blog:
- Why Financial Literacy is Important
- What You Need to Know About Debt Management
- How to Save Money Each Month