If “do I need an emergency fund” is a question you’re asking yourself, then the answer is YES! Everyone needs an emergency fund of sorts.
Why do I need an emergency fund?
It’s always a good idea to have an Emegency Fund available where you can quickly access money. You never know when something is going to happen. Think of how your finances would cope with a car service which costs 3-times what you expected. Or, if you needed to be admitted to hospital but your medical insurance requires you to pay upfront. Perhaps your washing machine suddenly stops working, or a power failure causes everything in your freezer to go bad. You could even have your credit card blocked and be in a difficult spot for a few days.
See FrugalLocal’s take on Emergency Funds.
You just never know what might happen!
It’s just useful knowing that you have something extra saved for that rainy day. And yes, it is a great stress relief knowing that you are sorted for emergencies.
And take a look at what I call a “Buffer Fund” – different to the Emergency Fund, but equally useful!
How much do you need?
Circumstances are different for everyone so you need to make this decision yourself. Think about things that may have happened in the past where you suddenly needed extra money. Also think about things that could happen.
- Do you have pets?
- What about children or ageing parents? (My auto-correct made that “raging” parents which I thought was quite amusing)
- Are you single or married?
- Do you own your house? What emergency expenses could crop up?
- How reliable is your car?
- What unexpected events have happened to friends or family recently? Would you need to be able to cover that sort of event?
This is certainly not an exact science, rather just a ball-park figure which would make you feel comfortable and less stressed. Having something is better than nothing, so if you really can’t figure out how much to aim for, just set a low limit and see how it goes.
If you are single and living at home you may find that a R2,000 emergency fund is more than sufficient. A young professional renting an apartment and driving a snazzy car may need R10k – R15k. And a family maybe R30k.
These are just made-up numbers, try to calculate what you would need.
What type of account should I use for my emergency fund?
The three important factors about the account you use for this Emergency Fund are:
- How much interest will you earn? (obviously more is better)
- Are there fees or charges? (obviously less is better)
- How quickly can you access the money?
The purpose of an Emergency Fund is that you can access the money immediately. Anytime, day-or-night. Imagine needing to draw cash at at ATM at 2am – would you be able do so? Even if it involved using your online banking to transfer money between accounts; as long as it can be done quickly.
If you have a home loan from a bank, it could be very helpful to stash this extra cash in that account. Provided of course that the home loan account allows for withdrawals or transfers. Doing this would allow you to save interest on your debt, and this is often high. If you’re not sure contact your financial institution.
Have you considered keeping all your savings in one account and simply tracking the various goals in a spreadsheet? Have a look at how to use Savings Pockets to simplify your life.
How to start an emergency fund?
The best way to start anything is just to start! You don’t need to have enough money or know exactly what you’re doing before you start; just make the conscious decision. A few guidelines though would be:-
- Decide on your number. How much would you like to have saved in this fund?
- Decide which bank account to save it in – investigate the options but remember to keep your life (and admin) as simple as possible.
- Create a budget if you haven’t already.
- Set yourself a goal to save the necessary funds.
Once you have started you will see that circumstances may change, or you may need to use your fund sooner than expected. That is all fine, just relook at this often and be sure to be working towards this.