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Everything You Need to Know About Building Emergency Fund

Life is uncertain and you might end up in some emergency that might need you to have enough funds to cover the expenses. But what if you don’t have enough money in your bank account to cover the emergency expenses? In such a case, having an emergency fund will come in handy. 

Of course, you can take a personal loan to cover your financial gap, but this might take some time for approval and in an emergency, this might not be the right option. So, if you haven’t set up an emergency fund, now is the time. 

But do you know what an emergency fund is and how you can set it up so that you always have some money just in case you need it immediately? If not, keep reading this article to find out more. 

What is an Emergency Fund?

An emergency fund is defined as the money you save in your account. It is the money you can use only when you have unplanned expenses. 

Usually, while you are creating a budget, you know how much money will be needed for your usual expenses such as electric bills, groceries, water bills, house rent, and more. But you don’t know how much you will need when you or anybody from your family falls sick or loses their job or the only source of income. In situations like these, having an emergency fund will be beneficial. You will be able to pay your medical bills or cover your living expenses until you find a new job. 

Therefore, if you haven’t set up an emergency fund, you must take the required step to set up an emergency fund. 

Another reason why an emergency fund is important especially in South Africa because most people live on a paycheck to paycheck basis. So, when they don’t have money to cover emergency expenses, they take a long-term or short term loan. This strategy might seem like a good one at the time, but it backfires when they have to repay the loan over time. 

So, instead of taking out a loan every time you need money, it is better to save up every month. This gives you peace of mind when you have an emergency.

Emergency Fund: How to Create it?

If you thought keeping extra money under the mattress or in your pant pocket is what we mean by the emergency fund, then you are wrong! Setting up an emergency fund takes consistency and dedication with a thought to have a better future. Here are two ways you can set up an emergency fund:

  • Savings Accounts

As the name suggests, it is an account specifically created to save money. Most banks offer savings account where you can save money that also builds interest over time. You can make withdrawals but can’t use them on day to day basis. So, this makes it a perfect type of account to save money. 

Savings account agreement that you sign might require you to make monthly deposits. You can also find high-yielding accounts that are insured. 

  • Transactional accounts

As the name suggests, these are the accounts that you can use for making daily transactions. The type of account you receive your monthly income to is transactional accounts. You can also have a different transactional account to build your emergency fund. 

But know that most transactional accounts don’t build any interest. Also, they might have monthly charges. To find what is the best option for you, make sure you get in touch with a financial advisor. 

Emergency Fund: How much money you should put? 

One thing you must know is that building an emergency fund will take time and consistent effort from your end. So, start your emergency fund with an end goal in mind which is to have enough money that allows covering your emergency expenses if the need arises. 

If you ask the experts how much money you should put in your emergency fund, they will say money at least worth your salary for three months. Some will say you must have enough money in your emergency fund that allows you to sustain for six months in case you lose your job. 

All in all, you must make sure that you have a strategy in place for building the emergency fund such as:

  • Put some money aside every month after you have made your budget. It doesn’t need to be thousands of Rands, instead, you can put R100 or even R50 to the very least. This will build up over time. 
  • When you find lose money in your home or at the end of the month, make sure you save it up rather than spending it.
  • Another way to ensure that you put money in your emergency fund every month is by setting up a debit order from your salary account. The amount will be automatically transferred to your emergency fund account. 

Emergency Fund: What are the benefits?

  • You will learn the best way to handle personal finances.
  • You will be disciplined and would avoid the temptation to make unnecessary expenditures. 
  • If you have an emergency, you don’t need to borrow money from your family or friends or apply for loan online.
  • When you have an emergency fund, you can earn more money with high interest rates. 
  • You will always have peace of mind because you know that you always have backup money to cover your expenses. 

Emergency Fund: What are the features it must have?

  • Make sure your emergency fund is easily accessible when you need it. You shouldn’t be in a position where you can’t withdraw money from your emergency fund due to some regulations. 
  • Make sure you create your emergency fund in a bank that is registered with a good reputation. 
  • Make sure your emergency fund is always gaining value. It shouldn’t lose value due to inflation. 

When you have set up an emergency fund, you can rest assured that you have a backup. However, if you want to take out a loan, make sure you visit our website Snappy Loan where you can compare, search, and review the different loan offers in South Africa.

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