Part 1: Start or Top-Up your EMERGENCY FUND

This is a savings account or investment account that has a minimum of 3 but preferably 6 months of your household expenses saved in it.

If you don’t currently have one, start one NOW. If you didn’t previously see the value of it, I’m sure 2020 has opened your eyes to the value of having ‘Rainy Day’ money stashed away.

This will typically be a money market account or notice deposit (with no more than 30 days’ notice) or combination of the two. The whole idea is for it to be accessible in the short-term. Your primary concern should not be return on your money but quick access.

Since interest rates are at record low levels at the moment, you could consider using an Income fund as an alternative to park your Emergency fund in. This should give you approximately 2% – 3% higher return than a savings account or Money market account without sacrificing too much liquidity.

Typically, a Savings Account and Money Market Account, linked to your banking profile should be accessible immediately on the same day you need it.

An Income Fund is typically accessible within 2 to 3 workdays to perform a withdrawal.

Lastly, no Emergency Fund money should be parked in a notice deposit that has more than 30 days’ notice. You could distribute you Emergency Fund Savings equally among these 3 options or only use 2 or even one. The choice is yours.

The 2nd method of building up your Emergency Fund is to “invest in your debt”. Warning this is only recommended for individuals with financial discipline and self-control. Be honest with yourself before deciding on this method, if you know you lack the discipline then don’t do it.

What do I mean by “Investing in your debt”? What I mean is, pay off any credit facility that remains open and active even if you pay it off faster.

Examples of “open access credit facilities where the money paid in can be withdrawn again later”:

  • Credit Card

– Start here if you have more than one of the listed facilities since it usually will have the highest interest rate.

– Only do this if you know you can control your spending habits and will not “Swipe away your savings”.

  • Overdraft & Revolving loans

– These usually have an interest rate close to or just below your credit card.

  • Access Bond (Flexi Bond)

– This usually has the lowest interest rate of the three, but still 3% to 6% higher than you are likely to earn on a Savings Account or Money Market account.

– This is also a better option to use if you know that you lack financial discipline, since you can’t just swipe your card to access the funds, like you can with an overdraft or credit card.

– There also seems to be a psychological barrier to taking money “out of your house” for consumption expenditure.

Remember “Interest Saved is as Good as Interest Earned” especially since the rate on your debt is likely to be much higher than the return on your deposits. There is also a 2nd benefit, you don’t have to pay (don’t end up paying) any tax on the interest you save, compared to the interest you earn on cash, which if the amount is high enough you will be taxed on.

The following credit facilities are not considered appropriate for building up your Emergency Account, since the money paid in is usually not accessible to be withdrawn later once paid in.

  • Personal Loans
  • Vehicle Finance Loans
  • Traditional Bond with no “access or flexi facility”

Remember the main purpose of an Emergency Fund is to be accessible on short notice.

It is the primary “shock absorber” you put in place to protect your other longer-term investments. Typically, an investment aimed at higher growth over the long-term also tends to be less “Stable” over the short-term. This means that if you have no emergency Fund in place, you might have to tap into your growth investments at a time when they are in a dip. This is especially likely if the need for money, is due to circumstances that have affected the wider economy and not just you personally. This is exactly what happened during the Covid pandemic.

So, remember, your emergency fund is not just there to protect you and cover your expenses in times of need but is also a part of your long-term wealth protection strategy. 

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