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Emergency funds: Avoiding financial ruin

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Emergency funds: Avoiding financial ruin

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And so you’re off to the emergency fund room

I have this stash of about R 100 which I keep in a secret compartment in my wallet just in case something happens, as life does. It’s especially for that day when you need a coffee or parking at a shopping mall – and you don’t have any money on you.

As Murphy’s Law reminds us, anything that can go wrong will go wrong. We try and stay ignorant, and when the unspoken happens – like you have urgent medical expenses due to a brain aneurysm.

Now imagine you lose your job. 

Your car breaks down. 

Your wife leaves you.

To top it all off, you find yourself at the doctor with blood haemorrhaging from your arm where you got a tattoo recently.

Lo and behold – you find yourself financially ruined. 

Why do I need this?

We sort of need a bigger secret compartment in our wallet that we can forget about until the time that we are in need.

An emergency fund allows us to buffer against financial disaster.

You should not use this money because you did not budget properly, but for things that are urgent, life or death, and things that cannot wait for your next paycheck.

Related: Why have an Emergency Fund?

Different types of emergency funds

Yeah, I thought I would throw this one in here… You thought there’s only one, right? Well, you could lump it all together, yet I suggest that you know how the money is split for your different purposes – different secret compartments. 

The two main emergency funds are personal and business (which I would call my emergency property fund).

Personal emergency fund

Your emergency fund is for your things. Think of it as the ‘you’ fund that lets you sleep soundly with the storm outside. Here are a few ideas what should qualify for spending:

  • Retrenchment or getting fired – in the local economic climate this is a reality we would not like to think about. Use the money until you can find a new job
  • Your car broke down so badly that you are so financially ruined, not even your mom loves you anymore – I do recommend that you need to save for car maintenance and services separately.
  • Medical expenses in case of an emergency – if your medical aid doesn’t cover it and you might die, then use this with discretion. Don’t use it for day to day medical expenses like chronic medication or vitamins!
  • Your geyser burst and the place is flooded.

Related: How to take charge of your money

How much do I need to save?

The general feeling in the personal finance community is you need 3 months of expenses in an emergency fund account. More than this can be saved, and less is too risky. 

Though this is not a one size fits all, it’s a good starting point for the normal Joe on the street.

Do you need more than that? Well, here are some questions to get you thinking about that:

  • If I get retrenched or fired,
    • How easily can I get a new job? How long will it take? 3 months? 6 months? You will need about that amount of money available within 30 days of something like this would happen or you could starve to death.
    • Could this ruin my career? If yes and you need to look into how long it might take to rebuild it or change careers and make enough money to survive
  • If my car broke down into smithereens or my insurance failed to pay out after an accident, what would the financial impact be?
  • If I need to visit the emergency room today and my medical aid does not cover the expenses, what do I need to pay?

Related: Your Saving Grace: An Emergency Fund

Business emergency funds

Property emergency fund

Many of us have a rental property, but few of us have the capital if things go south. I budget for at least 1 month per year for each rental property to stand empty, just as a safety net. 

Unfortunately, you still need to budget for other crisis – think about the kitchen being ruined due to a geyser bursting or the tenant decided to do animal sacrifices in your living room…

This is an excerpt from Frugal Local. See the full article here. Reposted with permission.

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Hey, I am frugal... I love talking about property and money. Some interesting facts about me: I drink too much coffee. I have walked the Camino de Santiago twice. I have the most awesome wife. I am a software developer by day.

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