Creating an emergency fund
An emergency fund is important to ensure that you are not left destitute or having to borrow money in the event of an unforeseen event or emergency.
How much do I need for my emergency fund?
Most people use a multiple of their salary as an emergency fund that provides them with a buffer with 6month’s income should anything go wrong. For the optimal emergency fund, one can look at the following:
- Your total monthly debt repayments.
- Your monthly expenses excluding your debt repayments and saving contributions.
- Now deduct any passive income (income you earn from investments, property or business ventures) you have on a monthly basis.
You can now decide on the multiple of this amount you want to have. Your multiple will depend on how long you foresee yourself surviving without receiving your salary.
How do you save for your emergency fund
If you do not have an emergency fund you will need to start saving on a monthly basis to build your emergency fund. Consider the following criteria when choosing an account where you will save your emergency fund in:
- You need access to the account in the event of an emergency.
- You can have a portion of the funds available after placing notice as this will earn you a higher interest rate, but you should not add all the funds to this account.
- Avoid accounts with a monthly service fee as this might drain your account instead of working for you.
- You might not want an account that you can access via a debit card as you might be tempted to use the funds for something else.
Need more guidance
Download our emergency fund analyser tool to find out if you have a sufficient emergency fund.