An unexpected event can have a devastating impact on your finances. You might lose your job, your house might need urgent repairs or you might have a health crisis. These are all scary scenarios, but if you plan properly, you can make sure you have enough money saved to deal with whatever curveballs life throws at you.
Enter the emergency fund…
An emergency fund is a safety net, designed to protect you if you need access to cash quickly (like in a family emergency) or if you need a stable income over a short period (while you look for a new job after a retrenchment, for example).
‘But I have insurance!’ you cry. That’s great, but sometimes an emergency will fall outside the scope of your cover, or a claim might be delayed or disputed. That’s when an emergency fund is key.
How much do I need to save?
Most experts suggest that you should keep at least three to six months’ worth of living expenses in your emergency fund. ‘Living expenses’ might include costs for accommodation, transport, groceries, healthcare, insurance premiums, personal expenses and debt repayments.
Each person is different and there’s no magic number. Use 22seven’s budget feature to help you determine your monthly living expenses and save towards a figure you feel comfortable with.
Your emergency fund should be separate from the bank accounts you use daily, so you aren’t tempted to use it for non-emergencies. Buying an expensive gift, paying for a holiday, doing routine maintenance on your vehicle… These are not emergencies! And remember, if you use some of your emergency fund, be sure to replenish it as soon as you can.
Your emergency fund should be easily accessible. The nature of an emergency means you’ll probably need fast access to cash. There’s no use having your money tied up in an investment that requires notice before you can access it.
Choose a savings account with low market risk. The market will always be turbulent, but a lower-risk account will give you peace of mind that your money will still be there when you need it.
At the same time, you still want to earn some interest. That’s why many people choose a money market account for their emergency fund. It’s a low-risk investment that earns higher interest than a normal bank deposit, plus it’s easily accessible and separate from your other accounts.
How to get started
You don’t have to build an emergency fund overnight, but you do need to start as soon as possible and save as much as you can each month.
Start by calculating how much you need in total (three to six months’ worth of living expenses, remember) then break that amount into monthly contributions that you can afford. Add your emergency fund contribution to your budget and set up a recurring transfer from your bank account to your emergency fund. That way you won’t have to think about paying each month and you won’t be tempted to spend the money on other things.
Once you’ve reached your minimum goal, keep contributing to your fund until you feel comfortable that it will cover almost anything life might dish out.
And lastly, don’t forget to check on your fund every now and then. The amount you need for emergencies will change as your life changes, and as your financial circumstances change. The total needs to be reviewed as part of your overall financial plan. A financial advisor can help you with this, and help you choose the right type of account for your emergency fund. Be proactive with your money and you’ll never be caught out!