Why you need an emergency fund

Weathering life’s storms and emergencies

Life is full of unexpected surprises − both pleasant and unpleasant. The best you can do is to make some emergency provisions for hard times, especially financial hard times. One way of weathering financial storms is to manage your money wisely by setting up a realistic budget that includes an emergency fund. “Save a part of your income and begin now, for the man with a surplus controls circumstances and the man without a surplus is controlled by circumstances”, advises Henry Buckley.

What is an emergency fund?

An emergency fund is a special savings account set up with the sole purpose of saving money for unforeseen emergencies such as a pay cut or job loss, rising inflation and interest rates and the myriad of small things in life − appliances that break, ill health or accidents − that often do go wrong and that need money to put it right. If you do not have an emergency fund it becomes just too easy to grab a credit card or apply for an expensive personal loan to tide you over but also to blow your budget and get you into debt. No truer word was ever spoken than that saving and debt is like oil and water; they just don’t mix!

How to set up an emergency fund

Here are five practical tips to help you set up your emergency fund.

1. Get into the saving habit. The amount is immaterial at the moment, just get into the habit of saving money and treating it as a non-negotiable monthly expense.
2. Set up a separate savings account and, if possible, have the money debited from your pay check and directly deposited into this account every month. You will be surprised at how soon it starts accumulating, especially if you adjust the amount every time your salary is raised.
3. Financial advisers recommend placing the money in a low-risk, high-interest savings account or mutual or money market fund to prevent inflation eroding the value of your savings. With a money market account your money is invested in a mixed bag of short-term debt instruments and savings products that offer higher returns than your average savings account. Different banks offer savings account products, so shop around.
4. Make sure you use this account only when a “real” emergency situation arises. If you just can’t resist dipping into the honey pot, consider a savings account with early withdrawal penalties. Banks and other financial institutions are usually prepared to pay more interest if you’ll agree to let them use your money for a longer period of time.
5. Finally, every family should have an emergency savings account that can “cover at least eight months of living expenses. And I also want every woman to have her own personal savings account that could support her for at least three months, because you never know”, advises Suze Orman, doyen of financial planning.

Last word

“The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind” (TT Munger).

Sources
Debt and savings are like oil and water. 2014. Retrieved from: http://www.moneymarketing.co.za/debt-savings-like-oil-water/
Fontinelle, A. 2009. Eight financial tips for young adults. Retrieved from: http://www.investopedia.com/articles/younginvestors/08/eight-tips.asp
Orman, S. Suze Orman’s 10 tips for a fresh financial start. Retrieved from: http://www.oprah.com/money/Suze-Ormans-10-Tips-for-a-Fresh-Financial-Start
Saving money quotes. Retrieved from: http://www.personalfinancequotes.com/cat/saving1.htm
Siddons, S. 10 tips for staying on budget. Retrieved from: http://money.howstuffworks.com/personal-finance/budgeting/10-tips-for-staying-on-budget.htm
Six tips on money management for young people. 2012. Retrieved from: http://under30ceo.com/6-tips-on-money-management-for-young-people/
Szesciorka, A. 10 financial management tips for the new employee. Retrieved from: https://www.mint.com/blog/how-to/10-financial-management-tips-for-the-new-employee/