Stuff happens! How to set up an emergency fund

It’s quite easy to start the process of creating a buffer to life’s inevitable calamities.

Aubrey Masango speaks with Dr Frank Magwegwe, Head of Financial Wellness and Advisory at Nedbank.

“Stuff” happens, so building up a fund for emergencies is a smart thing to do.

People think about investing in shares, in cryptocurrencies, and in unit trusts. But the foundation of having emergency savings, we often take for granted.

Dr Frank Magwegwe, Head of Financial Wellness and Advisory at Nedbank


1. Track your monthly income and expenses

So, the first thing to do is to actually know how much money you have and what you are spending it on.

Make two lists. One is for all of your mandatory expenses (home loan, car payments, municipal rates, electricity, school fees, etc.). Do not add your groceries to this list; that’s for the second list. Total the mandatory amounts up and then deduct them from your monthly income.

Now make a list of your typical monthly groceries. A good place to get individual prices is to use the Checkers Sixty60, Woolies Dash, and/or PnP ASAP apps. Those provide an easily accessible tool to get accurate pricing for the groceries you regularly buy.

Now, this part is subjective, but once you have this list, delete the non-essentials (ice cream, chocolates, donuts, etc.). Add the total of the remaining items and deduct it amount from what’s left of your income after having already deducted the mandatory expenses.

The amount that’s left is your disposable income and it’s from this amount of money that you’ll carve out your emergency fund.

2. Decide what your monthly emergency fund goal should be

With your disposable income now known to you, decide what a comfortable amount is to take out of that. This part is really subjective and what makes sense for one individual or family doesn’t always sync up with another. There are two good starting points to work from. One is to take 50% of your disposable income and then increase or decrease that amount until it feels comfortable to you. The second is to set a year-long target for yourself – even if that’s just R1000 – and then divide that by twelve.

Regardless of which method or amount you use, if it’s small enough that it can be drawn out of your disposable income, then you’re set. Also, don’t be discouraged if the amount you can afford is particularly small. Even R50 a month adds up over a few years.

3. Where to save your emergency fund

The point of an emergency fund is that it should be available to you in an emergency. So an investment fund, retirement annuity, or some other complex financial instrument is not the way to go. The idea is that you should be able to access this money as quickly as you would your daily transactional account.

A high-yielding savings account is one option so that you see some increase in value.

Another option is your credit card, as it is incredibly versatile, accepted almost everywhere and there are generally better safety and security options. Also, while you are at the beginning of your emergency fund journey, should something dire come up, the available credit on the card could act as a buffer for you. Once you have achieved your fund goal, you can always transfer the money to a different account.

It’s also not a bad idea to have your emergency fund with a different bank than the one you normally use. This is purely a psychological trick for yourself as it will solidify in your mind that that bank is for emergencies.

4. Automate your emergency fund deposits

This is a simple step that will really ensure your fund grows and that you don’t forget any payments. Most of the four big banks, allow you to set this up via their banking apps or online portal. Typically, once you make the first deposit in your emergency fund you can then set it up as a recurring payment.

5. Maintain discipline

This is the hardest part. It’s stating the obvious, but an emergency fund is for emergencies only. Don’t dip into it for any reason other than an emergency. It’s not there for matric ball shoes, a staycation, or Fortnite V-bucks.

Ideally, you will never need to access this money at any point and over a few years it will bloom into a significant amount. You could reevaluate if you’ve never used it in 10 years, but it’s still advisable to keep some of it in that account even when you reach old age.

Scroll up to listen to the interview.

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