You’re young, you love your job, and you make good money. You’re also financially responsible and take savings and investments seriously. But do you have an emergency fund? If not, you should and here’s why.
Just like insurance policies, an emergency fund should be part of your wealth management plan. If all goes according to plan in your life, you might not have to use it but the truth is that there are a number of reasons why an emergency fund is a financially sound idea, even for a top earner.
Here are five reasons why you have an emergency fund:
1. Job loss
Whether you’re retrenched (with or without a package), fired, or your organisation shuts down, you need to be prepared for the loss of your monthly salary. The harsh reality is that even if your income ceases, your expenses won’t. Your emergency fund should be as large as possible but at least large enough to see you through 6 months without a salary so you are able to sustain your lifestyle (without incurring major debt) until you are back on your feet. It may take time to build up your reserve but it’s worth it.
2. Unexpected medical expenses
A trip to the ER, injuries from a car accident, a necessary surgery… medical bills as the result of an unexpected accident or illness can quickly pile up. Even if you have medical aid in place, it might not cover everything and you could be left with co-payments or certain ‘out of cover’ hospital expenses that you can’t afford to pay with your monthly salary. Also, if you are unable to work due to an accident or illness, you might also lose income (especially if you are self-employed and rely on hourly billings).
3. Out of the blue expenses
If your car suddenly breaks down or your geyser bursts, will you be able to pay for the repairs that just can’t wait till next month? Even if you have insurance, it might not cover every instance and you might not be able to wait for a pay-out to complete an essential repair. What about credit cards? Credit cards, even when they are properly managed, mean debt and they still have to be paid off at some point.
4. Paying the tax man
If you’re self-employed, you need to be prepared for managing tax payments and they may be bigger than you anticipated. If you don’t have the cash flow to pay a tax bill on time, this could land you in hot water with SARS. At the very least, you could end up paying penalties and forking out even more money in the long run. An emergency fund can act as a useful stop gap until you are able to get your hands on the necessary funds. Just be sure to top up the fund again as soon as you can.
5. A big move
Whether your spouse wants to relocate or you get a great job in a different city, moving is more much expensive than most people realise. Between finding a house, arranging for movers (for your furniture, your pets, your office equipment etc.), and all the other things that come with uprooting your life and settling elsewhere, a move can be an expensive undertaking. An emergency fund can be a real help in this instance – useful for covering expenses like extra insurance or essential house repairs.
If you don’t have an emergency fund in place and you are hit by an unexpected (and costly) event, you might find yourself deep in credit card or loan debt, struggling to repay interest-driven amounts or forced to compromise your savings and retirement plans. Don’t let that happen to you – start an emergency fund today.
Need more great advice for your financial life? As independent financial advisers, the team at TRG specialises in wealth management and believes in creating sustainable lifestyles for our clients.