Starting an Emergency Fund With a Small Amount Is Vital | Legacy BlueStar | Sanlam Financial Planners Bellville, Cape Town

Financial Planning

Starting an emergency fund with a small amount is vital!

The current COVID-19 pandemic has shown us the importance of planning for anything that life can throw at you. It is therefore important to start saving even a small amount as long as you start saving a portion of your money.

Before the pandemic, suggesting that you hold about 3-6 months’ worth of salaries would be seen as ideal to many people. However, this might be unrealistic as the pandemic has increased financial pressure in many households.  We need to encourage more individuals to acquire the financial knowledge and confidence to be able to minimise debt to free up income to contribute to emergency savings.

TIPS

Some tips on starting an emergency fund

There’s a common misconception that you need a lot of money to make an emergency fund feasible. That’s simply not true! The key message is that it’s fine to start small. Contribute R10 or R100 when you can but getting started is what’s important.

It is important to view your money holistically. If you can slowly pay more towards your interest-bearing loans and credit cards, you can minimise that outflow of income. This can lead to freeing up money to be used towards an emergency fund in the future. You may see it as a small step today, but it’s a step that could produce big results soon.

If possible, start by saving small amounts towards your emergency fund while continuing to pay off your debt. Once you have reached your emergency savings goal, shift your focus to paying off your debt as quickly as possible. That way, if you are faced with unexpected expenses such as replacing a tyre, you won’t have incurred more debt to cover the costs.

There’s also a common misconception that young people don’t need an emergency fund. But what happens if your geyser bursts unexpectedly? That can set you back significantly as a young adult who is trying to progress financially. When these things happen, we often use our credit cards, which can perpetuate the cycle of debt. Having an emergency fund helps to cover you when these curveballs come your way.

First, you need to decide to start saving. Then you need to decide where to save your money. For an emergency fund, consider an investment vehicle that earns you compound interest and is accessible without a penalty, with a reputable financial institution. Consider having a debit order set up for your emergency fund contributions; that way you will pay yourself first, before any other expenses.

Be specific about the amount you want to save towards and review this goal constantly. If your goal is to save R1 000, you save and build up to R1 000, then maybe increase the amount to R5 000 once the goal has been reached. If you happen to use some of the money from the fund due to an emergency, you need to plan how you will replace this money and reach your goal again.

No amount is too small to start an emergency fund

Having savings set aside gives you a sense of control and preparedness and this resilient psychological mindset can boost motivation to continue with positive money behaviours. These all set you on a path to financial confidence and freedom.

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