Research from Budget Insurance reveals that just over half (52%) of South Africans aged between 18 and 55 years old say they are saving for an emergency but many would not be able to cover an unexpected expense of R10 000.
“That’s why we encourage South Africans to budget for two separate savings funds: a rainy day fund and an emergency fund,” says Susan Steward from Budget Insurance. “The rainy day fund is for smaller amounts and short-term expenses whereas an emergency fund is there to support you if there is a sudden disruption to your income, such as a job loss.”
Rainy day funds are generally once off costs which you need to cover, but haven’t planned for, and will help to keep you out of debt and overspending. The money would normally be held in a savings account which you can access within 24 hours. In short, this fund will get you through to your next payslip.
The emergency fund, on the other hand, will cover you in the unfortunate event that you are retrenched or suffer a sudden illness. It will cover items such as rental, bond repayments, vehicle repayments and living costs. This money should be put into an interest bearing account, such as a 32 day notice account. You could also put this money into an access bond which can help save interest on your repayments. Essentially, it is the money you have to fall back on.
“Our survey revealed that people would either need to borrow more money from friends or family or take out loans to cover any shortfalls. However, by having, and budgeting for the two separate savings accounts, you will protect not only your income, but also the money you put away for any emergency, big or small,” says Steward.
Step 1: Budget, budget, budget
At the end of the month, do you find yourself asking: “Where did all my money go?” You’re probably not budgeting smartly enough. You need to go through each item on your statement to find the culprit(s) – in most cases food, impulse purchases and non-essentials. These small things add up each month, and could very well be turned into rainy day savings. For example, start by just eating out one or two times fewer, and you could easily save between R300 to R500.
Step 2: The emergency fund will help your rainy day savings
Putting enough money away for a three to six month salary buffer can be daunting. Rather than becoming overwhelmed, save up a one month buffer and see how long this takes you. Then you can adjust your savings for the second month and so on. Your rainy day fund will help you save for the emergency fund, as you shouldn’t need to dip into it too often.
Step 3: Automate your savings
Set up a monthly debit order to be paid into your rainy day savings account. Review your budget every six months and see how you can make adjustments to not only save more, but also see your money grow to keep ahead of inflation.
Step 4: Make the most of your good fortune
Whether it is an increase in your salary or tax break, when windfalls happen, we are tempted to spend the money and spoil ourselves. First focus on clearing your debt, starting with debt with the highest interest rate first, and then deposit the rest into your rainy day account. A salary increase can be converted into a windfall, every month. Commit to at least six months of putting the difference in your earnings into your rainy day account.
Step 5: Protect your savings in emergencies
Savings accounts for emergencies, big or small, will go a long way to bringing you financial security, but having the right insurance cover to protect your savings will also help. Consider that, when your roof gets damaged due to a heavy downpour, you might need to act quickly to have gutters repaired and tiles replaced, to avoid further and more costly damages. It is likely that you will need to make payment on this upfront with your rainy day savings, but the right insurance cover will allow you to claim the initial outlay back, therefore replenishing your rainy day money.
“Saving money, especially with today’s high cost of living is very tough. That is why you owe it to yourself to first focus on the things you need, including savings funds, then on the things you want. It takes discipline and practice, but once your savings habit has formed, it will become easier to grow both the rainy day and emergency savings accounts,” Steward concludes.