Life is full of surprises; unfortunately, not all are good. While you can’t predict every challenge, being financially prepared makes unexpected problems easier to deal with.
Thank you for reading this post, don't forget to subscribe!Gavyn Letley, Product Head at specialist loans provider DirectAxis, says the first step is to consider what you can realistically insure for.
“These are events that are difficult or impossible to recover from financially if you don’t have insurance or an emergency fund. These unforeseen events could include your home burning down, your car being stolen or written off in a crash, or a long hospital stay because of illness or an accident.”
You can, and many people do, insure against all or most of these things either because they are required to when they take out a bond to buy a house, or get a loan to buy a car, or because they see sense in insuring an expensive asset. Many employers offer medical aid or a hospital plan as part of a salary package.
But what about life’s more common upsets, such as when an essential appliance, such as a freezer or oven, stops working, a car breaks down or a pipe bursts?
Letley says that few South Africans have enough saved to deal with these sorts of problems, which can be expensive and very disruptive.
“Having money set aside in an emergency fund makes it easier and less stressful to deal with problems.”
An emergency fund should be a savings priority. You should try to save a minimum of three months of your living expenses. It can be hard if you’re struggling to make ends meet, but any money that is put aside will be helpful if disaster strikes.
For longer-term savings, maximise the government’s tax-free savings incentive. In the last Budget, the finance minister increased the amount you can save tax-free each year from R36 000 to R46 000 a year.
While an emergency fund is always the best way to deal with unexpected events, if you haven’t saved enough or the expenses exceed your savings, taking out a personal loan is another option if you need money quickly. The application process is usually quick and easy, and you can have the money in your account within 48 hours.
Research by DirectAxis shows that dealing with life’s emergencies is the leading reason South Africans apply for personal loans.
The research polled registered users of Pulse, a free digital tool that allows users to check their credit rating, track their income and expenses, and receive guidance on how to improve their financial standing.
When asked why they applied for a personal loan, 28% said it was to cover emergency expenses. Just under 20% wanted the money to renovate their homes, while nearly 11% said they would spend it on education.
When applying for a short-term loan, you need to consider that there are strict criteria in place to protect you from borrowing more than you can afford, even if it is an emergency. That’s why having a good credit record is important.
To create an emergency fund, consider the following:
- Getting started is the most important part. You should aim to save about 5% of your income each month for unexpected expenses.
- Keep the money in a separate account, so that you’re not tempted to dip into it. Money market and tax-free savings accounts are two options. Ideally, set up an automatic monthly transfer.
- Keep saving until you have enough to cover your normal household expenses for between three months or more. That way, you’ll have a reasonable cushion.
- If you need to use some or all of the money, try to cut back on non-essential expenses such as entertainment or holidays until you’ve replenished it.
- Maintain a good credit record, so that you have alternative options if your emergency fund runs out.
To find out more about planning for life’s less pleasant surprises and how to better manage your money visit: www.directaxis.co.za/make-a-plan/all