Where should you keep your emergency savings?
You never know when disaster is going to strike, and how much it is going to cost. Even though you cannot prepare for everything in life, you can at least be financially ready when you need it.
Moneybags journalist Ashleigh Brown looks at what an emergency savings fund is, and where the best place is to keep you emergency savings.
Just as you are about to sit down to do some work, your laptop decides to die. It is the middle of the month, and you still have other expenses to take care of. What are you going to do? Well, if you have an emergency fund then the problem is solved.
The point of an emergency fund, or a rainy day fund is to help you out when life throws those curve balls that you just cannot afford. The fund should be easy to access, and can give you a financial cushion in the times you need it.
But, you also have to be dedicated in actually putting money into the account. If you do not budget, or save, then when something goes wrong, you are going to have a tough time paying for it.
The Common Sense Finances website has a handy spreadsheet on how to calculate your monthly expenses, and can help you with budgeting.
How much is enough?
There is no easy answer to this, because everyone’s needs are different. But, if something does happen, you should be able to live off of your emergency savings in the meantime.
“This [emergency fund] should be at least one month’s salary, but ideally between three and six months of your salary. Your fund can be used to cover things like replacing tyres, medical bills not covered by medical aid or a burst geyser and should be topped up as soon as it is depleted,” says Karin Muller, head of growth market solutions for Sanlam Personal Finance.
Once you have your number, and know how much you will need, you need to start investing your money. This is going to take discipline and dedication. To avoid the temptation of spending the rainy day fund money you should always ‘pay’ yourself first before you pay anyone else.
As the American business magnate Warren Buffet once said: “Do not save what is left after spending, but spend what is left after saving.”
There are different options when it comes to emergency funds. Generally you would want to have instant access to the cash, as emergencies do not just wait for you to get your money together. Therefore, a money market account, or savings account would be the best.
These types of accounts offer you some interest on your money (so that it is actually doing something while sitting there waiting for an emergency), and you can get the money instantly in most cases.
However, Muller says that you should consult a financial adviser as to what type of emergency fund you should open.
“Once this has been determined, they will advise you which financial institution you should visit in order to set up the appropriate emergency fund, for example, whether it should be a fixed savings account, a tax-free savings account or a money market fund,” says Muller.
René Grobler from Investec Cash Investments says that you must consider what fees are being charged when choosing an emergency account, as fees can erode your capital.
She says you must also consider if you need all of your funds available instantly or if you can afford to give notice to have a portion of your funds accessible. Accounts with notice periods generally pay customers more interest.
“Banks offers a number of savings accounts where people can save their emergency funds for immediate access, while at the same time earning interest on the account,” says Nolene Parboo, Standard Bank senior manager for deposits and retail banking.
For example, Standard Bank offers call deposit accounts, 32 day notice accounts and fixed-deposit accounts to name a few.
“All these savings accounts offer flexibility and interest depending on the amount saved and how long it is in the account,” she says.
Nedbank’s JustInvest account works much the same, offering you 5.25% interest, and your money can be accessed within 24 hours.
“While each type of account has its benefit, call accounts would be best in the case of emergency savings as they allow you immediate access to your money,” says Parboo.
She explains that the process is straightforward: Simply transfer funds from your linked transactional account into your savings account via any of your bank’s online channels or direct deposit. The money is then available whenever you need it. In addition, you earn competitive interest rates and you can also add any amount into the account at any time to boost the returns on your savings.
Muller concludes by saying that the tax-free savings account is another tool available to people to help them meet their financial goals over the longer-term.
“And a proper financial plan taking into account all your financial needs will enable you to make the most of an investment in a tax-free savings account,” she says.
But, be advised that using a tax-free savings account as an emergency fund is only appropriate if you are not planning to access the funds unless it is for a big emergency since you cannot replace your savings if you have reached the maximums.
“Consider investing in one that is flexible and has tailored investment options such as the Sanlam Tax-free Investments product for example,” says Muller.
Wherever you decide to invest your money, make sure that it is the best option for your needs. An emergency fund is there for emergencies – and no, a shopping spree is not an emergency. Be diligent in your savings, and soon good financial health with become a habit.