Key to an emergency fund is to start small: Farzana Botha

Cape Town - A Sanlam survey of over 1000 individuals in 2021 revealed nearly a fifth of respondents had no savings to speak of. An overwhelming majority (54%) couldn’t make their money last to month-end. Of those polled, 49% wished they’d contributed regularly to an emergency fund. These frightening stats show the extent to which South Africans are struggling. When many can’t make it to month-end, an emergency fund may seem like a pipedream. Farzana Botha, Segment Manager at Sanlam, suggests starting small. 

“Covid-19 made most people aware of the need for an emergency fund, ideally comprising 3-6 months’ worth of salaries. However, the pandemic also heightened financial pressure in many households, making this target simply unrealistic.  We need to empower more individuals to get to a place of financial knowledge and confidence to be able to minimise debt to free up income to contribute to emergency savings. 

“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. Getting started is what’s important.”

Here are some of her tips to make an emergency fund happen:

1. Tackle debt: FNB Research revealed that over 80% of the bank’s middle-income customers have no, or limited, savings that they can access within seven days. Even the country’s more affluent individuals seem to be struggling. Botha suggests that tackling debt is a good starting point. “You need 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 frees up money to be used in the future towards an emergency fund. It’s a small step today that can bring big results down-the-line.” 

2. Start today: Alternatively, start by saving small amounts towards your emergency savings right away while continuing to pay off your debt, even if you can only afford the minimum installments. 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 like a burst geyser, you won’t have to take out more debt to cover the costs. 

3. Tackle mind-sets: There’s also a common misconception that young people don’t need an emergency fund. Botha says, “Young people have expenses that creep up unexpectedly as easily as an older established person. Imagine your tyres all need to be replaced. Or you need an emergency CT scan for a broken wrist. Or your geyser bursts. 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 happen.”

4. Save smartly: Botha adds, “First, you need to make the decision to save. 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. A financial adviser can help guide your decision.” Consider having a debit order set up for your emergency fund contributions, that way you will pay yourself first, before any other expenses. 

5. Have a goal in mind: Be specific about the amount you want to save towards and review this goal consistently. If your initial goal is R1000, you save and build up to R1000, then increase the amount to R5000 once the goal is reached. If you happen to use some of the money from the fund, due to an emergency, you need to plan around how you will fill it up again to reach the goal that you want to achieve. 

She concludes, “There is no amount that is too small. Having savings set aside gives you a sense of control and preparedness and this resilient psychological mind-set can boost motivation to continue with positive money behaviours. These all set you on a path to financial confidence and freedom.”