You need a rainy day and an emergency fund
Research from Budget Insurance shows that 52 percent of South Africans, aged between 18 and 55, say they are saving for an emergency but many would not be able to cover an unexpected expense of R10 000.
“That’s why we encourage South Africans to budget for two separate savings funds: a rainy day fund and an emergency fund,” says Susan Steward from Budget.
“The rainy day fund is for smaller amounts and short-term expenses, whereas an emergency fund is there to support you if there is a sudden disruption to your income, such as a job loss.”
Rainy day funds are generally for once off costs that you need to cover but haven’t planned for, and will help to keep you out of debt and overspending. The money would normally be held in a savings account that you can access within 24 hours. In short, this fund will get you through to your next payslip.
The emergency fund will cover you if you are retrenched or suffer a sudden illness. It will cover items such as rental, bond repayments, vehicle repayments and living costs.
This money should be put into an interest-bearing account, such as a 32-day notice account. You could also put this money into an access bond, which can help save interest on your repayments. It is the money you have to fall back on.
* Budget, budget, budget. At the end of the month, do you find yourself asking: “Where did all my money go?” If so, you’re probably not budgeting smartly enough. You need to go through each item on your statement to find the culprit(s) - in most cases, impulse purchases and non-essentials. These small things add up, and could be turned into rainy day savings. For example, start by eating out one or two times less, and you could save R300 to R500.
* The rainy day fund will help your emergency savings. Putting enough money away for a three-to-six-month salary buffer can be daunting. Rather than becoming overwhelmed, save up a one-month buffer and see how long this takes you. Then you can adjust your savings for the second month, and so on. Your rainy day fund will help you to save for the emergency fund, as you shouldn’t need to dip into it too often.
* Automate your savings. Set up a monthly debit order to be paid into your rainy day account. Review your budget every six months and see how you can make adjustments not only to save more, but also to ensure your money grows to keep ahead of inflation.
* Make the most of your good fortune. Whether it is an increase in your salary or tax break, when windfalls happen, we are tempted to spend the money. First focus on clearing your debt, starting with debt with the highest interest rate first, and deposit the rest into your rainy day account. A salary increase can be converted into a windfall, every month. Commit to at least six months of putting the difference in your earnings into your rainy day account.
* Protect your savings in emergencies. Savings accounts for emergencies, big or small, will go a long way to bringing you financial security, but having the right insurance to protect your savings will also help.
Consider that if your roof is damaged due to a heavy downpour, you might need to have gutters repaired and tiles replaced, to avoid further damages. It is likely you will need to make payment on this upfront with your rainy day savings, but the right insurance cover will allow you to claim the outlay back, replenishing your rainy day money.