What is emergency fund savings? (+ how to grow yours fast)

The best way to risk real financial difficulty is to go through life without an emergency fund.

Seriously. A lot of South Africans reach for credit cards or loans when times get tough and unexpected costs pop up.

There’s a better way to protect yourself. It’s called an emergency fund.

Here’s why you need one and how to start building your own.

 

Emergency fund

Having an emergency fund is a crucial part of financial planning. It offers a lump sum of cash to use when unexpected costs come up. Let’s go over the important stuff.

 

What is an emergency fund?

An emergency fund is a lump sum of money set aside for emergencies. Like unexpected expenses or emergencies. It should cover things like car repairs, medical bills, or loss of income. Without the need to rely on debt or dip into investments and other savings. Generally, an emergency fund should cover at least three to six months of living expenses.

We’ll cover how to build your emergency fund and where to save or invest the money in a sec.

But first, in case you’re not convinced…let’s go cover why it’s so important.

 

 

Why you need an emergency fund

Having an emergency fund can help protect you from unexpected expenses—without relying on debt. It protects people from dipping into their retirement savings and investments or relying on high-interest loans and credit cards.

Remember, debt comes with interest. Using a R30,000 loan to cover an unexpected expense may cost R45,000 (or more) by the time the debt is settled.

And what if you have a bad year and three unexpected costs pop up all at once? Then, what? That’s why you need an emergency fund.

Common emergency fund emergencies:

• Sudden job loss
• Unexpected medical expenses
• Urgent home repairs, like fixing a burst pipe or roof leak
• Major car repairs
• Family emergencies
• Pet emergencies
• Replacing broken appliances
• Unplanned travel for family emergencies
• Coping with the effects of natural disasters

 

Okay, we can agree that emergency funds are important, right? Now, let’s go over how to start building your own.

 

Emergency fund savings

An emergency fund should be able to cover at least three to six months of living expenses. Aim for six months or more. 

 

How to grow your emergency fund savings

To grow your emergency fund, start by setting a realistic savings goal based on your monthly income and expenses. Then, automate your savings by setting up a monthly transfer from your primary account to your emergency fund. The goal is to steadily increase your emergency savings each month.

Follow these steps to grow your emergency fund:

1. Calculate your target amount: Work out how much you need to cover three to six months of living expenses.
2. Set up automatic bank transfers: Use your banking app to create recurring transfers. Transfer a fixed amount from your primary account to your emergency fund every month. (And be generous.)
3. Reduce non-essential spending to free up more money for emergency savings: Identify areas where you can cut back and redirect that money into your emergency fund.
4. Use windfalls, like bonuses to boost your emergency savings: Direct any extra income, such as bonuses or tax refunds, into your emergency fund.
5. Review and adjust regularly: Check your progress often and make adjustments to stay on track with your savings goals.

 

Got it? Good. You’ll like this next part.

 

 

Did you know…if you ‘save’ wisely, your emergency fund can start to grow on its own?

Check this out.

 

Where to save emergency fund savings

Save your emergency savings in an account [or accounts] that offer good interest rates and flexible access. This could be an interest-bearing flexible savings account or a money market account. The goal is to save the money where it can continue to generate interest and grow.

Here are some good options:

• Save in an interest-bearing flexible savings account: Earn interest on your savings while keeping your money easily accessible. Banks like Capitec and TymeBank offer really good interest-bearing flexible savings accounts.
• Use a money market account: To get higher interest rates than regular savings accounts and still provide easy access to your funds. Unlike flexible savings accounts, money market accounts typically require somewhere between 32 to 90 days notice. Keep this in mind.
• Consider a fixed deposit with a short-term duration: Fixed deposits offer higher interest rates. Just make sure it has a short-term duration or allows for penalty-free early withdrawal. That way, the funds will remain accessible in an emergency.

 

⭐ Related content:

• How to invest money in South Africa (for beginners)
• The 3 Best savings challenges in South Africa (try it out)
• Best savings accounts in South Africa (Unlock more money)

 

How to use emergency fund savings

Emergencies should only be used for real financial emergencies. Things like car or urgent home repairs, medical bills, or a loss of income. After using some of the money, make sure to save enough to replace what you used as quickly as possible. The emergency fund balance should always be able to cover three to six months living expenses or more.

Some ‘emergencies’ are easier to plan for and may not have to rely on an emergency fund.

These are a couple of things you could plan ahead for…

 

Which emergencies are easier to plan for?

Certain emergencies, though unpredictable, can be anticipated to some extent, making it easier to plan for them.

While you can’t predict the exact timing or cost, you can prepare for situations like:

• Household repairs: Things like plumbing issues, appliance breakdowns, or roof leaks.
• Car maintenance: Unexpected repairs or part replacements.
• Medical expenses: Costs for unexpected illnesses, surgeries, or accidents.

 

Being financially prepared for these types of events can help you manage them without stress.

 

In summary

You should have emergency fund savings to protect yourself and your money.

Emergency savings help cover unexpected expenses without the need to rely on credit or dip into other savings or investments.

Remember, debt comes with interest costs. For most South Africans, a R100,000 loan typically costs well over R120,000 to repay. Try to avoid it. It’s a waste of money. 

Build up and use an emergency savings fund instead.

If you want to talk to someone about managing your debt, we can help. Try our online assessment at My Debt Hero to see if you qualify to reduce your debt.