Bank Better, Live Better
the backup plan22/11/2017
It’s important that you have an emergency fund; something to fall back on when crisis hits.
It’s usually easier to save money when you have a specific target in mind, such as putting your child through university or a holiday overseas.
But what if the goal is to be protected when a crisis occurs? How do you make provision for an unforeseen event?
In general, an unexpected cost or event could take more out of your budget than you could afford at that time, or prevent you from earning an income.
The most common unexpected costs people face:
- Retrenchment and job loss. You might be let go or leave a job for personal reasons
- Medical emergencies. You could end up in a private hospital for an emergency procedure not fully covered by your medical aid or you don’t have any medical cover
- Accidents or vehicle repairs. If you’re involved in an accident or your vehicle malfunctions, you may need to pay an insurance excess or cover the full cost of the repair
- Household maintenance. A geyser burst and the lounge is flooded. If you don’t have insurance to cover you, you’ll need to pay for the replacement and repairs yourself
- Unexpected travel expenses. If a family member dies unexpectedly, you may need to travel long distances to the funeral
- Replacing or repairing lost or damaged items. You dropped your laptop and the screen cracked or the hard drive needs to be replaced. Unless you’re insured you’ll end up paying for the repair or the replacement
How much is enough?
Your emergency fund should at least equal your full monthly budget. Ideally, it should be big enough that if you lost your job, you could continue living at your current standard for 6 or more months while you hunt for a new one.
Tip: Retrenched? Bounce back in 10 steps.
Ways to save
Even if you don’t know what type of crisis you’re preparing for, it will always be something that needs money immediately. At the same time, you get the best interest when you put your money into a fixed-term savings account, where you usually can’t get immediate access to it.
The answer? Split your emergency fund contributions in two. Put some into a flexible account that you can access instantly if you need to, with the rest in a fixed-term account.
You can set up an automatic free transfer every month that moves the money you need to save from your main transaction account into your savings account.
Finding the money to save
It’s not always easy to see where the money to save will come from.
Here are some smart ways free up some money:
- Avoid the most common money mistakes
- Use banking tools that save you time and money
- Cut your fuel bill
- Save on your cellphone bill
- Ask for a discount
- Ditch your unused loyalty program
- Reduce your electricity bill
- Shop and save
- Reduce debt
The money you save is to cover you when a crisis hits. Not being able to afford the latest PlayStation isn’t a crisis. Feeling stressed is arguably a kind of crisis, but not one that justifies spending emergency fund money on a weekend getaway at a spa resort.
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