You’ve probably heard it many times: you should ‘save for a rainy day’. Having an emergency savings fund helps you prepare for unexpected costs that may arise. Emergencies can be anything from replacing your microwave to a big car or home repair. It’s a good idea to have money set aside for such so that you don’t have to turn to debt and cause yourself an unnecessary headache while losing money in the process. An emergency savings fund guarantees peace of mind and spares your from obtaining another bad, high interest debt.
It might also be a good idea to separate small emergencies from large emergencies and then split that up. For instance a leaking tap emergency isn’t the same as a ‘suddenly out of a job’ emergency or you have a ‘big (and pricey) surgical procedure that medical aid won’t cover’ emergency. You need to be adequately prepared for both types of emergencies. Keep in mind that the economy changes and those changes might affect your job security.
Where should it go?
You should keep your emergency savings account in an account that you don’t necessarily have easy access to on a day to day basis. Aim for an account that isn’t linked to your transactional account, but avoid an account that’s too restrictive. For instance, putting money into a 32-day notice account is great if you’re saving for a trip or a car, but may not be a good idea if you need to fix a leaking roof. Think carefully about how to structure your savings and practice self discipline. Shop around for a bank with low fees, compare ease of access and minimum/maximum deposit amounts.
How do I save?
Automate. This is the simplest way to make sure that you’re putting money aside. When you treat your savings like you do all your other essential expenses, it becomes easier to prioritise and allocate a percentage of your earnings towards your emergency savings account. Knowing how much you can and should save needs you to be honest about where you are financially and a decision to change any bad financial habits. Set up a savings plan, and allow yourself time. It won’t happen in a month, or three.
How much should I save?
Work your goal out in steps. Aim for one month’s worth of living expenses. Once you’ve reached that goal, work towards three months, then six. Stagger your goals to avoid being overwhelmed by the number you’re working towards, especially when you’re just starting to save. However,, the most important thing to do is simply start. If working towards a particular figure is too daunting, then set a goal to start saving a specific amount every month and then increase your contributions every quarter or every six months. This might be easier as the focus isn’t so much on a big number as it is on making small numbers bigger.
Don’t forget to pat yourself on the back for each saving milestone. You deserve a little recognition for your efforts, learn to praise yourself.
You can also check out this video on saving for a rainy day: The Emergency Fund Talk