Life has a way of throwing curveballs, so having an emergency savings fund can offer you peace of mind and financial stability when you are faced with a financial crisis.
Himal Parbhoo, CEO of FNB Retail Cash Investments, said: “Whether it's an unexpected car repair, an unavoidable medical bill, or a change in employment status, unexpected events are waiting around each corner.”
“And while we won’t ever know when these little surprises might take place, with an emergency fund in place, at least we are prepared to handle whatever financial impacts they bring with them.”
Tyrone Lowther, head of Budget Insurance, recommends that people have three to six months' worth of expenses saved up in their emergency fund.
Here are the reasons why an emergency savings fund makes a lot of sense:
Money stress
An unforeseen emergency can be a source of major stress if you don’t have the finances to deal with it. An emergency savings fund can be a buffer that gives peace of mind which can save you from having to making tough financial decisions.
Taking advantage of opportunities
An emergency fund is not just for financial protection. It also gives you the flexibility to grab onto various opportunities as they happen.
These opportunities could be starting a new business, pursuing further education, or investing in a unique opportunity. An emergency fund gives you the opportunity to take on these risks without the worry of the financial repercussions.
Saving
According to Parbhoo, people who have home and vehicle insurance, can reduce their monthly premiums by increasing their excess.
“An emergency fund allows you to choose a higher excess, and you can then plough the money you save on lower premiums back into the savings fund. Talk about a win-win,” Parbhoo said.
Stop relying on credit
Using a credit card to pay for emergency expenses can result in monthly repayments that can cripple your budget.
Having an emergency fund can help you avoid your dependency on your credit card as well as protect your credit score should you miss credit card repayment down the line.
Starting an emergency fund
According to Parbhoo, people avoid starting their own emergency fund because they feel that they don’t have enough money to put away.
However, even in challenging times, it's possible to save small amounts regularly.
Here's how to start:
Draw up a budget - a simple budget helps you track your spending as well as identify areas to reduce expenses so you can free up funds for your emergency savings.
Reduce non-essential expense - Instead of only cutting out luxuries, you should consider affordable alternatives for your internet or cellphone plans, cancel unnecessary subscriptions, and look for better deals on insurance and other expenses.
Automate your savings - set an automatic monthly transfer from the bank account into your emergency savings. Think of it as paying yourself first which you will later enjoy as it grows.
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