Last month I talked about Step 5 - Invest 15% of your earnings. Let's continue with Step 6 - Set up an emergency fund. You should prepare for a rainy day. Things can happen and will happen. A death in the family, sickness, accident, a punctured tyre, someone in the family comes to borrow money, the phone is stolen ... unforeseen expenses, the list goes on. Or you lose your job. Or your business is negatively impacted by COVID. Having an emergency fund can help deal with these instances, cushion the blow. You should use a bank savings account, separate from your daily transactional account, to set up an emergency fund. You should have a minimum of 6 months' pay in that emergency fund, to be safe. For example, your monthly take-home pay is R40,000. Then you should have R40,000 x 6 = R240,000 in your emergency fund. If you ever lose your job or your income, then you can sustain yourself and your family for six months, while you look for another job or find the next source of income. If your business has a monthly expenses of R200,000, then you should have R200,000 x 6 = R1,2 million in the company's emergency fund. If you have not reached the ideal emergency fund amount, create a plan to top up the emergency fund every month. Maybe you have more income or receive a bonus in a month, use part of that money to top up your emergency fund. Continue with this process until you have reached the target of having 6 months' worth of income in your emergency fund. From time to time, you may have to access the emergency fund as emergencies come up. That's exactly what it's for. After you have taken money out of the emergency fund, top it up again, until you reach the ideal emergency fund amount. So what vehicle should you use to keep your emergency fund? I would recommend the following three options: 1. Bank savings account: This is an ideal vehicle for keeping your emergency fund. It is safe and liquid. You can withdraw money at any time. A savings account, call account or money market account will work. What is not recommended is fixed deposit account and notice accounts. These type of bank savings accounts tie you up for a period of time, maybe 7 days, one month or even longer. The emergency fund is there when you need it. You don't want to put the emergency fund in an account where you cannot access immediately, or with penalties if you want to access it. 2. Home loan with access bond facility. If you have a home loan, make sure you have the access bond facility. I always make sure my home loans have access bond facility. It is an excellent financial management tool for personal finance. This allows me to pay more into the home loan when I have extra money, to reduce the capital amount and interest payment. I can take out the extra money I put in at any time. Watch this to know the 7 things you should know about home loan. The segment on Access Bond starts at 20:10. The beauty of this solution is it reduces the interest and capital amount outstanding as you pay the extra money into the home loan account, but when you need it, you can take it out.
So imagine you put in extra money every month, over some time you have put in extra R240,000 in total. So you have R240,000 you can access in your Access Bond facility. There is your emergency fund! 3. Income funds. These are unit trusts, or collective investment schemes, that invest in a wide variety of assets, such as cash, credit, government and corporate bonds, inflation-linked bonds and listed property, both in South Africa and internationally. These funds focus on investing in income generating assets. In the current low-interest rate environment, they offer an attractive yield of 6% to 7%. In the short term an investor may experience temporary capital value fluctuation, but you can expect positive return over any 12 month period. Examples of good income funds are: Coronation Strategic Income Fund, Ninety One Diversified Income Fund, Nedgroup Flexible Income Fund. Any questions on emergency fund for Uncle Kevin? Email to service@daberistic.com.
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