A financial safety net can protect you from the vagaries of life
Life is full of surprises, and unfortunately, not all of them are good. Although you can’t foresee everything that can happen, unexpected problems are easier to manage when you are financially prepared.
Nozizwe Fakude, head of consumer insights at DirectAxis, says the first thing to consider is what you can realistically insure.
“These are events that are difficult or impossible to recover from financially if you don’t have insurance or emergency funds. These unforeseen events could include your house burning down, your car being stolen or destroyed in an accident, or a long stay in hospital due to illness or accident,” Fakude explained.
You can, and many people do, insure against all or most of these things – either because they are required to do so when taking out a bond to buy a house or getting a loan to buy a car. , or because they deem it logical to insure an expensive asset. Many employers offer medical aid or a hospitalization plan as part of a salary package.
But what about life’s most common upheavals, like when an essential appliance like a freezer or oven stops working, a car breaks down or a pipe bursts?
Fakude says few South Africans have enough savings to deal with these kinds of issues, which can be costly and very disruptive.
“Having money set aside in an emergency fund makes it easier and less stressful to deal with issues,” Fakude added.
An emergency fund should be a savings priority. Ideally, you should try to save around three months on your living expenses. It can be difficult if you’re struggling to make ends meet, but any money set aside will come in handy when disaster strikes.
If an emergency fund is still the best way to deal with the unexpected, if you haven’t saved enough, or if expenses are outstripping your savings, taking out a personal loan is another option if you need cash quickly. . The application process is usually quick and easy and you can have the money in your account within 48 hours.
What you need to consider is that there are strict criteria in place to prevent you from borrowing more than you can afford, even in an emergency. This is why it is important to have a good credit report.
To create an emergency fund, consider the following:
- Getting started is the hardest part. Ideally, you should aim to save about five percent of your income each month for unexpected expenses.
- Keep the money in a separate account, so you’re not tempted to dip into it. Money market and tax-free savings accounts are two options. Ideally set up an automatic transfer.
- Keep saving until you have enough money to cover normal household expenses for three months or more. This way you will have a reasonable cushion.
- If you need to use some or all of the money, try cutting back on non-essential expenses such as entertainment or vacations until you’ve replenished it.
- Maintain a good credit history so you have other options if your emergency fund runs out.