We have now entered season 2 of the national lockdown and I’m very close to losing my marbles. The heavy bad news cycle is also affecting my spirits. We are all strapped into this rollercoaster, trying to keep sane at every twist and turn. Despite all of this, there are some important money lessons coming out of this lockdown. Some weren’t caught with their pants down. Let me shumayela (Preach) and explain.
For many years, financial advisors and planners have been spreading the good financial word around the importance of building an emergency fund. This is a savings account with money to cover 3-6 months worth of your expenses, in the event of a financial emergency. ** Clears throat** Covid 19. A type of personal insurance against disaster. Those that have an emergency fund have cashed in and are not too stressed about paying bills over the next couple of months. They were prepared for any emergency!
To be fair, nobody could have predicted that Covid 19 would have such a dire impact on the economy and our lives. Resulting in a lockdown that has grinded most industries to a complete halt. When the dust finally settles, many people will sadly be left unemployed and businesses will shut their doors. This will be start of a domino effect. How will they pay off their monthly debts? School fees, rent, groceries and fuel?
This lockdown is horrible but also provides a practical example of why an emergency fund is so important. To protect yourself against unforeseen circumstances that would create a financial emergency, such as the Covid 19 pandemic that has pushed us into a lockdown. Those who have this safety net are able to cover all their expenses without hassle for the next couple of months. Let me stop being a wet blanket! This isn’t the time to chastise those who don’t have an emergency fund, but rather a time to preach the good financial word, and encourage people to take this moment as an opportunity to learn and adopt new financial behaviours. To build and emergency fund! Can I get an AMEN?? ** Clutches bible closer **
An emergency fund is essentially a savings account (Interest-bearing) in which you have saved 3-6 months of all your expenses. It’s money that you will use in the event of a financial emergency. It should be an account that you can easily access, but not so much that you would end up abusing it. To start building an emergency fund you would need to consider a few things:
Create a monthly budget to identify all your expenses and tally them up. Ensure that you are spending less than you earn.
Identify an appropriate savings or money market account that has a good interest rate, low fees and is fairly easy to access.
Then start putting the excess funds from your budget into the account until it reaches your goal, which would be 3-6 months of your expenses. If your monthly expenses are R7500, then your goal would be to have R45000. This would cover all your expense for a period of 6 months, giving you a safety net.
Whilst building your emergency fund, you could split your monthly savings from your budget. Paying a bit more towards your debts, while simultaneously putting money into your savings accounts. You would be killing two birds with one stone. Reducing your debts and the total goal that you would need in your savings account.