If there’s anything we’ve learnt from 2020, it’s that crises can happen and, although we can never be completely prepared, we can try. Having an emergency fund is a smart move and it’s simple. It’s an amount of money set aside for nothing in particular – apart from the unpredictable.
As you may have read in our recent blog post, How to spend your salary, Octogen advises you save 5% of your monthly earnings for emergencies. But what exactly does this mean?
Does my insurance count as an emergency fund?
No. For example, the car insurance payment you make every month is not emergency saving. Your emergency fund is for when you have that inevitable minor crash and have to fork out R3 000 before your insurer will cover the R30 000 in damage to your vehicle. It’s for those sudden expenses you didn’t plan for. It’s the excess, the co-payment or the penalty fee. Your emergency money is for unexpected costs, not standard cover.
How much do I need to save for emergencies?
The exact amount of money you should save for emergencies varies for everyone, but here’s the general rule of thumb. Add up all your monthly expenses and times that number by three. That’s right, you should have a safety net of at least R15 000 set aside, but at least enough to cover three months’ worth of expenses.
Having trouble keeping track of all your monthly expenses? Use this free budget planning tool to help you spend and save better.
Should I wait until all my debts are paid?
No, you should start saving towards an emergency fund immediately. This may seem a bit backwards, but expert advice says don’t wait to start saving for emergencies. You never know when the unexpected will happen (and how much it will cost you). In fact, the best way to build up savings for the unexpected is to use money that comes from unexpected sources.
Where should I save money for emergencies?
Not under your mattress, that’s for sure. It needs to be somewhere safe. Ask your bank for options such as a 32-day call account, which guarantees your capital with lower servicing fees and higher interest potential than a cheque or savings account. Your emergency fund needs to be accessible but so readily available that you might be tempted to spend it. So, don’t use your regular bank account to save for emergencies or stick it in a long-term investment, but find something in between that works for you.
Does having an emergency fund make me financially healthy?
It’s definitely a solid foundation for your financial wellbeing. To check up on the overall health of your wealth, take our quick and easy quiz.