An emergency fund is not only useful to help you pay for unexpected car problems, household emergencies or unforeseen hospital bills, but it can critically determine whether you remain able to keep a roof over your head.
Many people, no matter how much they earn, live from pay cheque to pay cheque and don’t have anything left at the end of the month. Local studies have consistently shown that many South Africans turn to debt to fund even negligible financial emergencies, as most do not have an emergency fund in place.
An emergency fund should ideally have enough savings to cover three times your monthly salary. This will help you to self-fund day-to-day expenses and meet your monthly debt obligations should you become unemployed. Although many people deem this target unrealistic, the key is to break the hand to mouth pattern.
A strategy of saving whatever is left after spending is unlikely to succeed or get you out of the pay cheque to pay cheque scenario. You need to do the reverse of that in order to break the pattern.
Steps that can help you start saving from your currently stretched budget:
- Pay yourself first: Put money away for saving as soon as you receive your salary. It is best if this happens automatically. If you are first going to repay debt, try to increase the repayment amount. If you are ready to start saving, put a debit order in place. And, if you are struggling to put money away at the moment, the best time to start is when you get an increase.
- Understand where your money goes: Keep a spending diary for a month. Split your debit orders into debt repayments, essential expenses and non-essentials like eating out, coffee or magazine subscriptions. You may be able to create room to save once you’ve taken a hard look at your non-essential expenses. You also need to be critical – clothes are essential, but perhaps not those designer heels and you don’t need to buy something just because it’s on sale.
- Control your non-essential expenses: Most of us have a good idea of what our monthly essential expenses are, but we often don’t track our spending on non-essentials. Decide which of the non-essential are important to you and what you are willing to give up. For example, you can bring your own lunch to work, review your cell phone plan, use Wi-Fi calling or other social network calling options. Try cheaper alternatives for things you do often. For instance, if you eat out with your friends every weekend, you could replace some of these with an evening at someone’s house where everyone brings a dish or a course.
- Reassess your debt: You will most likely find money to save when you start using debt effectively. Try to stick to good debt (e.g. house, studies) and use cash for other expenses instead of using credit or store cards. You pay high interest on short-term debt, so make it a priority to reduce it. Once that is done, save the money that used to go to debt repayment.
- Create a realistic budget: While you need to make allowance for savings, you also need to budget for things that give you joy. Otherwise you run the risk of spending money on such things without actually budgeting for them. At least if you budget for them, you can make adjustments to your other monthly expenses upfront. It is easy to spend a lot of money on little things which you may not even be able to recall at the end of the month. Rather use your money to save for a real treat. Always make a list before you go shopping – this will help you stick to items that are in your budget and not get distracted.
- Save toward a goal that means something to you: Whether it is the deposit on a house, your children’s education, a comfortable retirement or a dream holiday, it is much easier to save if the savings goal is real and important to you, rather than to vaguely saving because “everyone needs to save”.