I always say that you cannot get out of debt until you have a savings buffer or emergency fund in place, simply because it’s that fund that will stop you from increasing your debt.
Topping the list of reasons why you should have such a fund, is the peace of mind this savings buffer provides.
Think about the following: when the COVID-19 pandemic struck and our country went into lockdown, how would you have felt if you had three months of your expenses sitting in an emergency fund? Slightly less worried, not so?
How to build an emergency fund
To save for an emergency fund, you need to set a goal for yourself: how much do you wish to accumulate in the fund?
- Then come up with an action plan:
- Save a fixed amount every month. Whether this is R500 or R5 000, let it be an amount that works for your budget.
- If you are a freelancer or earn on commission, a more practical approach would be to save a percentage of your monthly income.
- One of the quickest ways to beef up your emergency fund is through a cash windfall; you could save a percentage of your bonus or even your annual tax refund.
- The best, and probably the most, efficient way to ensure that you do save for an emergency fund, is to automate your savings. This could mean setting up a monthly debit order until you reach your emergency fund goal.
What kind of account to use for an emergency fund?
What would you like to save for? Is it for a rainy day, a goal, your retirement or your children’s education? The reason behind your saving, plays a role in the savings account you select.
- If you are saving for a rainy day, the fund needs to be liquid, meaning it should be immediately accessible with little to no risk of losing money, and without expensive penalties.
- Consider opening an account like Absa Notice Select, where you set the notice period and choose how much of your investment you want available immediately.
- Other options include Absa’s TruSave or Depositor Plus accounts, all of which you can access your money immediately.
- Once you have reached your emergency fund goal, you can consider saving for your long- term future using the Absa tax-free savings account
- Just ensure that the chosen bank account provides you with an interest rate that’s on par with CPI, or even better yet, one that beats inflation.
- An alternative to saving in a bank or money market account is to deposit your savings into your bond if you own a property. By putting extra money into your bond, the interest you pay on the bond is reduced, but the access facility means that the excess funds in your bond account are available for you to withdraw should an emergency arise.
Being ready to get things done – that’s Africanacity. And we’re here for it.