For many South Africans who live on or below the bread line, the luxury of a saving net to shield them from a crisis such as Covid-19 simply isn’t an option. But for those of us with stable incomes, it’s essential to save as much as possible towards an emergency fund.
Emergency funds shield us from the devastation of life’s unexpected expenses, from medical bills to home repairs, sudden and unexpected unemployment and even personal situations such as a divorce. When you have savings in place, you can focus on dealing with a crisis situation without worrying about how you’re going to pay for it – or accumulating more debt.
How much should I save?
Experts advise that we should aim to have between three and six months of our monthly incomes in a savings account and accessible in an emergency situation.
While this might seem completely unattainable, the key is to start saving. You’d be amazed how quickly you will have a decent ‘rainy day fund’ once you start putting the right saving habits in place.
It’s also important for your emergency fund to be in a separate savings account from your day-to-day expense account. You don’t want to be tempted to dip in to your reserves.
6 Tips to Build Your Emergency Account
Review your expenses
A good view of your spending habits will tell you where you’re spending money that you could be saving. Split your costs into non-essential and essential expenses. Shop around for quotes to see if you can trim back on your essential expenses, and determine which non-essentials you can cut back on and which you aren’t willing to give up. There are many smart ways to save money if you’re looking for them.
Create a budget
Once you have a good handle on your expenses you can create a budget. Factor your short-term debt into your initial budget. Servicing short-term debt is expensive – pay it off first before you start saving. Your goal should be to save 20% of your income each month, so your budget should ideally encompass the remaining 80% of your income. You might need to re-evaluate your non-essential spending to make your budget feasible. If you do manage to save 20% of your income each month, it will take you a year to build up your emergency fund.
Pay yourself first
Saving should be an expense – not an afterthought. Once you’ve factored saving into your budget, you can set up an upfront debit order that puts aside a certain amount towards your emergency fund before you do anything else. This also ensures that you won’t accidently spend the money.
Put any bonus cash away
From birthday money to tax refunds and bonuses, transfer any income over and above your normal monthly income into your savings account. You won’t miss it since it isn’t in your budget, and your emergency fund will quietly grow in the background.
Make sure your money grows
Take advantage of the benefits of a Tax-Free Investment Account, by investing up to R33 000 annually and tax-free. With Standard Bank’s Tax-Free Investment Account, you invest your money in the stock market through Exchange Traded Funds, providing access more than 250 JSE Shares and ETFs on an ad-hoc or recurring basis.
Looking for more flexibility when it comes to accessing your money? Investment accounts like our Flexi Advantage Investment Account allow you to invest a lump sum and still have access to a portion of your funds as and when you need to, while providing you with a fixed interest rate over the term of your investment.
Teach your children good spending habits
Teaching your children good spending habits has two key outcomes. First, you help your children to become financially savvy from an early age. The sooner they start saving, the bigger their emergency funds will be if they ever need them. Second, by displaying good habits for your children, you will naturally start spending less and saving more, which will support your own efforts to create financial freedom for yourself and your family.