Your Emergency Fund - How much is enough?
Correspondent | Friday March 26, 2021 14:20
I don’t know what to do.
My car started making a clunking noise last week, and today it stopped working completely.”
“My job (I’m a sales rep) requires me to have a car. If it’s not working I can’t work. I don’t know what I’m going to do.”
“I’ve had a very expensive month so far, and it is only the 18th. I’ve got another week to go before payday. Only then will I have the money to fix my car. What will my employer say?”
“How much will my income be next month if I can’t work this week? I rely on my commissions. I don’t know what I am going to do.”
“Maybe I can ask my family to help me with some money, or maybe I can go and see that loan company. I could ask my bank for a loan, but I don’t want them to know my troubles because I want to apply for a home loan soon. I’m worried it will affect my chances if they see me struggling now.”
“What am I going to do?”Does any of this sound familiar to you?
We’ve all at some stage experienced a time where we were desperately in need of some money to cover an emergency. Whether it’s a lost cell phone, a household problem (like theft or fire) not being able to work – or perhaps a family medical emergency.
These are all examples of crises that happen and that we can’t plan for. Surely there must be some way we can avoid this type of situation in our lives.
We all need an Emergency FundLuckily, there is something we can do. We can plan for all unforeseen emergencies if we have some savings reserved for such emergencies. This is commonly known as an Emergency Fund. As the name suggests, it’s a fund that’s there to be used for emergencies.
The questions to ask yourself when planning your Emergency Fund are:l Why might I need cash in an emergency?
l Have I ever needed this sort of help in the past?
l How much cash might I need?
To answer these questions you need to consider your own personal situation. However, it’s rare that we can only think of one emergency, and we should plan our Emergency Fund to cover more than just one potential problem.
Aim: Three Months SalaryThe basic rule of thumb is that the target for your Emergency Fund should be three months salary. If you start today with saving 10% of anything that you earn, and make sure you get interest on your money, you’ll get there in just over two years.
Here are some examples of the things
you might need emergency cash for:l My son gets sick on a trip – medical aid won’t pay and I have to send money fast.
l My kitchen catches on fire – I need to replace my stove and my fridge – quickly.
l My Aunt dies – I need to contribute to the funeral this week.
l My handbag is stolen the day after payday
l I’ve lost a month’s cash and my cellphone
l I get sick for two weeks – how will I replace the lost income from my business?
l My daughter has a once-in-a-lifetime opportunity to go on a trip with the school sports team – can I come up with the cash?
l My parents are coming to stay – how will I pay for the extra food?
l I get a huge utility bill – they say they’ll cut me off if I don’t pay.
Where should I keep it?You must also consider: where do you keep your Emergency Fund that it is safe, yet accessible in an emergency? At home? In the bank? In a money market fund?
My Emergency Fund must be:l Secure
l Easy to Access Quickly
l Not used for non-emergencies!
Lastly, you must be strong enough in your will-power not to spend your Emergency Fund on something that is NOT an emergency. It is not a fund that you can take loans from to buy that pair of shoes, or a fancier cellphone.
Remember: because it is easily accessible, you must be strong enough not to touch it – unless you’re in real trouble!
*Names in this article have been changed
JAMES FERN*
*James Fern CFP SCI WEALTH (Pty) Ltd, Botswana licensed Investment Advisers, giving financial planning advice, and financial education. For help and information contact 3180111 or advice@scifinancial.com