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Savings: Build an emergency fund

Don’t wait until you have more disposable income, rather start small and immediately.

With disposable income dwindling as the price of almost everything increases, South African’s often find it difficult to establish an emergency fund. Some find putting money into a fund such as this a non-essential. They couldn’t be more wrong.

Having an emergency fund, especially in today’s climate is pivotal. “As South Africans, who have a tendency to rely heavily on credit, we need to guard against the vicious cycle of debt dependency. One way of doing this is to put a portion of your income away every month for emergencies or that rainy day,” explains Aneesa Razack, Head of Strategic Growth at FNB Savings and Investments.

However, don’t confuse an emergency fund with your savings fund. In essence, an emergency fund is just that: Funds to be used in the event of an emergency. You don’t want to dip into your savings to pay for an unexpected event, or worse, use your credit card – thereby compounding the problem further.

According to the Old Mutual Savings and Investment Monitor survey, 9% of the population claim to be ‘living comfortably’, while 30% say they are ‘doing alright’. The question is, if 39% of the population feel that they are doing fine – what about the other 61%? Thirty-nine percent may have enough money to deal with an emergency (and even have an emergency fund), but how will the 61% react when an emergency arises?

One of the misconceptions that many South African’s have is that they will only start saving for an emergency fund once they have more disposable income at hand. However, one of the easiest ways to start saving is to do so immediately – no matter the amount. “According to FNB research, a key difference between savers and non-savers are that savers believe in the value of saving small amounts, like R10,” notes Razack. “While you might think that to get into the habit of saving will require a dramatic lifestyle change, you will be amazed at how small changes can free up extra money for you to save towards your goals – such as not buying a coffee at work every day.

“In an economy where the cost of living is increasing, these small amounts can help you to meet your savings goals despite financial challenges.”

Dharmesh Bhana, Head of Funding at Nedbank, concurs, saying that while you should ideally be saving a minimum of 5-10% of your monthly income, you must remember that no amount is ever too little.

An easy way to make saving into your emergency fund a priority is to create a debit order for it – again, no matter the amount. That way it’ll go off with all your other debits and you won’t have to worry about transferring money into that fund.

Asked about how much money one should ideally have in an emergency fund, Bhana says: “Many people advocate that you should have at least three times your monthly salary available … but this can only be determined by one’s personal circumstances, as well as your ability to save and maintain the required amount. It also requires a large amount of self-discipline to avoid the temptation of dipping in this fund.”

According to the Old Mutual Savings and Investment Monitor survey, 80% of working South Africans want guidance and to learn how to save better. What South Africans need to keep in mind is that even though we’re surrounded by a poor savings culture, we often overcomplicated something which is relatively simple. Therefore steps taken today (no matter how small) will compound and create a more positive financial future than those who refuse to plan ahead and take action.

Says Razack: “Savers are better shielded from falling to a debt trap than non-savers, since their savings will act as a safety net in times of financial hardship.”

How to start

Starting an emergency fund today is simple. Various banks offer a host of investment solutions to suit the needs of individuals – meeting them at the various stages of their life. For example, Nedbank offers the Justinvest account, which is a money market account offering extremely competitive interest rates and short-term accessibility. The bank also offers an EasyAccess Deposit which offers a guaranteed return of a fixed deposit combined with free access up to 50% of fund with 30 hours’ notice.

FNB offers a Simple Save, Call Account and a Money Market Investor account, to name but a few. Each of these are geared towards helping South Africans save – particularly for the health of their financial future.

With so many options available, as well as the help of financial advisors at hand, nothing should prevent you from creating an emergency fund. “Saving for emergencies is important regardless of how much you earn, since the nature of emergencies is usually unexpected,” explains Razack.

So, skip that early morning cappuccino and save that R20 – who knows, maybe saving that R300 a month will truly come in handy one day when you need it most.

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