investing in south africa

What most people don’t understand about emergency funds, and how YOU can succeed. 

While there might be people out there that enjoy tracking every penny on an excel spreadsheet. They account for everything they’ve spent and write a detailed list explaining their motivations for making the purchase. But unless you are a business owner or a student, this is not the relationship most people want to have with money.  

Yes, budgeting is crucial, planning one’s financial projects has value, developing good money habits is a must; but,  the reason we got into personal finance is usually to buy more things (in the long run and in a responsible way, yes yes yes, live below your means, you know where I’m coming from)  

By now, you know how to set up a budget that isn’t like a money diet, and you have a basic outline of where you want your money to go. What’s the next step of adulting that we need to add to our to-do list to increase our financial success?  

The Emergency Fund.

Giant Sigh. Emergency Funds can be a scary yet confusing endeavour. It’s completely normal to feel slightly intimidated by starting your own emergency fund. The majority of people are, in fact, most “middle-class” South African’s don’t have this crucial safety net.  

For most people, the barrier to entry is their own perception.   

“Why should I save so much money – and then not enjoy the fruits of my discipline.”  

This is a perception a lot of people might gravitate towards at first. Our mindset is engraved with this “bad saving habit.” We save for something, get barely enough money to purchase it, add it to our cart, and then become broke again afterward. The thought of saving funds “just in case” becomes quite daunting.  

Why do we have this poor mentality?

Most of us start off with this poor mentality because it was likely the only way we could purchase big-ticket things when we were younger or students living with our parents. At the time, we didn’t have any real risks or responsibilities, and our parents usually acted as our emergency fund. When we got into financial trouble, we couldn’t plan for *ring ring – ring ring* “Howzit Dad, how have things at home been?”  

When we were young and broke, this was all we could do. But we are past that now. The kiddie rides were fun at one stage, but now we are tired of going in circles. It’s finally time to acknowledge we have grown and get onto the next roller coaster of adulthood. The rollercoaster to financial freedom.   

Although, one of the things we need to safely ride this crazy rollercoaster is an emergency fund, which will act like seatbelts. With a safety belt you can trust, it’s easier to make decisions that might result in the roller coaster-making loops without going into a full-blown panic. When things don’t go as you anticipated, your emergency fund, i.e., seatbelts, will keep you safe.  

What exactly is an emergency fund?

An emergency fund is your financial safety net. It’s money you can access quickly without penalties. Needing to access this money in a pinch means the place you are saving is likely a low-interest savings account; more on that later.  

Where do I start?

The first step of creating an emergency fund is budgeting. You must understand this concept. If you don’t have a working budget, read this article now, I’ll wait.   

(Insert cricket sounds)  

Do you now have a way to develop a successful budget? Fantastic!  

Your budget currently shows you all your outgoing expenses. While it might not be perfect now, That’s okay.   

How much do I need to save?

Take note of all the things on your budget. For example, if you lost your job, what would you still require to pay to maintain your lifestyle? 

Add up all those numbers and find the total, multiply that number by 6, and – “wow, that’s bigger than I expected”  

This is your ULTIMATE emergency fund goal. Once we reach this number, we must stop adding more money to our emergency fund to put our money in platforms with a higher interest return. Remember, we need to utilize this emergency money quickly, so the banks are likely giving us a tiny interest rate, but for now – that’s okay.  

Before you freak out because of all the money you need to save, remember that you can take your time saving up to that final amount.  

4 tips to make building your emergency fund easier is:

  • Break this massive number into smaller, more obtainable amounts.  
  • Start small, yet consistent with monthly contributions  
  • Make these contributions automatic  
  • Keep refining your budget, adding the excess to your savings  

The biggest thing preventing you from building an emergency fund is your mindset. Having smaller, more obtainable goals is the easiest way to develop momentum and ensure you are driven throughout the process.  

Hopefully, this added motivation will spill over into how you refine your budgets. Inspiring you to cut back on unnecessary expenses so that the excess can be used to develop a safety net you can depend on!