Covid-19 shows us why we need an emergency savings fund
Saving a portion of your income each month is easier said than done but, without a well devised savings plan you may struggle to pay for unexpected financial events, like the repercussions of Covid-19.
An emergency fund forms an integral part of any financial savings plan and should have enough easily accessible funds to cover three to six months’ worth of living expenses. As the name suggests, the fund should only be used in the event of an emergency or unexpected occurrence such as:
- Major medical and dental expenses that are not covered by medical aid or where large co-payments are required.
- Costly home or motor vehicle repairs which are not covered by insurance. Servicing costs related to failed transmission on cars that are not in a motor plan
- Loss or reduction of income
The idea behind an emergency fund is to prevent us from getting into debt unnecessarily when faced with unexpected costs. You do not want to be borrowing from your future self – using your long-term savings - to pay for these unexpected expenses. What may seem like a good idea at the time could severely impact future plans and priorities as the money in your long-term savings will be robbed of that essential ingredient (time) which is essential for compounded investment growth. Withdrawing retirement savings, prematurely, has severe tax consequences too, and these negatively impact the amount of cash you can withdraw when you reach retirement.
The pandemic that is currently consuming the world, brings about new financial challenges of which we have never faced before. Many may have to possibly take a reduction in earnings which will negatively impact the monthly budget and their ability to meet monthly expenses. Where is the extra income going to come from.
Debt is not the answer, but a well-constructed emergency fund, would come in very handy in bridging the gap during these unprecedented times. If you do not have an emergency fund in place, then speak to your financial adviser and ascertain which investments in your current portfolio could possibly be accessed to achieve the same result without comprising future goals and additional cost considerations.
Another use for emergency funds may come at retirement. Many people do not realise that when you notify your retirement fund of your retirement, whether those be Pension, Provident or Retirement Annuities, it can take a while for the first payment to reach your bank account. Realistically, you may be without an income for two or three months after retirement while you await that first annuity payment and be unable to meet your day-to-day living expenses such as rates and taxes, levy payments and insurance premiums. An emergency fund will come in handy during these times and provide a stress-free, readily available form of income at no additional cost.
To get started with your emergency fund, set up a debit order every month into a separate, interest-bearing account each month, which is easily accessible without costs for accessing your money. Make sure you put your money in an account with an interest rate that matches inflation otherwise your money will lose value. Another way to save money is for homeowners to put extra money into their bonds each month, which also reduces the amount of interest you owe on your bond, saving you money. Work out what your target is and aim to reach it within a specific timeframe.
The sooner you start, the sooner your plan will come together. If you are unsure about which financial product to use or how they stack up in terms of liquidity, accessibility and cost, speak to an accredited financial adviser who will help you navigate the minefield of choices and put you on track to securing your financial well-being.
Gary Fisher is a financial planner & head Member education services at Alexander Forbes.