COVID-19 has taught us a few things – one of them is that we don’t need as much as we think we do. Another thing it has also (hopefully) taught us is the importance of an emergency fund, for both salaried peeps and business owners. Go Hustle chats to Adele Barnard, a financial advisor and investment specialist at Sanlam, about emergency fund benefits for you.
What is an emergency fund (EF)?
“An emergency fund is a savings buffer; either a fund or savings account to cover big-time unexpected expenses such as sudden job loss, car repairs, home disasters or medical emergencies,” says Barnard. The fund will prevent you from incurring debt – a credit card or personal loan is not the way to go in an emergency.
If you don’t have a three- to six-month emergency fund and your plan was either to sell items online, or worst case use your credit card to survive, you are not alone, says Barnard. But you can turn this situation around. Here’s exactly how to set up an emergency fund.
Steps to start your fund
1/ Assess your finances
Figure out how much money you need to cover your monthly expenses and lifestyle, scan your bank statement and create a budget accordingly. Also differentiate between emergencies vs non-emergencies (i.e. saving for a holiday).
2/ Cheque or savings?
Everyone should try to have at least three to six months’ salary available in their fund. Three months will be enough to cover most emergencies, but six months or more is even be better. “Your emergency fund can be saved in a money market account, which gives a good interest rate and is accessible without any possible penalties. I will not advise that you keep the funds in your cheque or savings account, as you will be tempted to spend it… Out of sight, out of mind,” says Barnard.
3/ Saving and self-control
“If you are in the fortunate position to start saving right away, use an automated debit order on your salary date and keep track of your goal to track progress in case you aren’t motivated,” says Barnard. Getting started is the scariest part, but all the small amounts add up!
4/ Cut expenses
“This lockdown period is also an ideal time to scan your bank statement and see where you spend money unnecessarily and can cut expenses i.e. those unutilised memberships or subscriptions, impulse online spending sprees, etc. If you receive bonuses/incentives, instead of splurging, rather put the money away in your emergency fund,” says Barnard.
Things are tough, but the best time to start is now! Emergency funds are the backbone of personal financial planning. Keep the discipline going, keep your life debt-free, and keep that fund growing.