Many of my clients often ask me an important question – should I save for an emergency fund, and how should I go about it?
For any working person today, an emergency fund is a must. Since the recent financial crisis, millions of people around the world have lost their jobs for economic reasons. The risk of job losses is still high in South Africa, making it essential to have a minimum of 3 months gross monthly salary in an emergency fund. The ideal amount to have in the fund should be closer to 9 or 12 months’ salary.
Why an Emergency Fund is Necessary
If you find yourself retrenched, you may not have sufficient funds to cover your loss of income. Medical expenses that are not covered by your scheme or rehabilitation after an accident will also need to be covered. Other expenses include: an expensive car service or paying your excess after an insurance claim.
Your emergency fund will give you peace of mind while you find another job; pay for the car service or pay for medical expenses. The emergency fund will provide you with much-needed funds that will help to pay for small and large expenses. You will not have to borrow funds from friends, family or the bank but rather be able to use the money in your emergency fund.
How to Create an Emergency Fund
In order to save between 3 and 12 months’ salary, you will need to put aside a set amount each month until your emergency fund reaches its ideal size. If you are having trouble balancing your monthly budget, don’t hesitate to email me for a consultation. We will assess your income and expenses and find ways to create a surplus that you can save in your emergency fund.
The final question most clients ask is: Where do I save it? While some people prefer a 32-day call account, others would opt to invest their emergency funds in unit trusts. Depending on how regularly you save, your appetite for risk, and your investment time line, you will save your emergency funds differently.
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