Life is full of surprises, unfortunately not all are good. While you can’t predict everything that may happen, unexpected problems are easier to deal with when you’re financially prepared.
The first thing to consider is what you can realistically insure for.
Some events that are difficult or impossible to recover from financially if you don’t have insurance or an emergency fund. These unforeseen events could include your home burning down, your car being stolen or written off in a crash or a long hospital stay because of illness or an accident.
You can, and many people do, insure against all or most of these things either because they are required to when they take out a bond to buy a house or get a loan to buy a car or because they see sense in insuring an expensive asset. Many employers offer medical aid or a hospital plan as part of a salary package.
But what about life’s more common upsets, such as when an essential appliance such as a freezer or oven stops working, a car breaks down or a pipe bursts?
Few South Africans have enough saved to deal with these sorts of problems, which can be expensive and very disruptive.
Having money set aside in an emergency fund makes it easier and less stressful to deal with problems.
An emergency fund should be a savings priority. Ideally you should try to save about three months of your living expenses. It can be hard if you’re struggling to make ends meet, but any money that is put aside will be helpful if disaster strikes.
While an emergency fund is always the best way to deal with unexpected events, if you haven’t saved enough or the expenses exceed your savings, taking out a personal loan is another option if you need money quickly. The application process is usually quick and easy and you can have the money in your account within 48 hours.
What you do need to consider is that there are strict criteria in place to protect you from borrowing more than you can afford, even if it is an emergency. That’s why having a good credit record is important.
To create an emergency fund, consider the following:
1. Getting started is the hardest part. Ideally you should aim to save about 5% of your income each month for unexpected expenses.
2. Keep the money in a separate account, so that you’re not tempted to dip into it. Money market and tax-free savings accounts are two options. Ideally set up an automatic transfer.
3. Keep saving until you have enough to cover your normal household expenses for between three months or more. That way you’ll have a reasonable cushion.
4. If you need to use some or all of the money, try to cut back on non-essential expenses such as entertainment or holidays until you’ve replenished it.
5. Maintain a good credit record, so that you have alternative options if your emergency fund runs out.