Why You Need To Build Up An Emergency Fund Or Risk Maxing Your Credit Cards

The rule of thumb is that you you need to save at least 20% of your income for 20 -25 years in order to retire. Simplistically, without taking inflation and salary increases into account, if you have been working for 5 years, and you have earned an average salary of 15,000 pm before tax; you should have saved at least R180,000. Assuming the best case scenario, most of these funds would be invested in a long term savings vehicle like a Retirement Annuity that prevents you from “dipping in” when you run into a cash flow crisis.

But what about a short term emergency?

The reality is that most people do not start saving from their first salary and having spare cash in the kitty for an emergency lives in the realms of fiction. In order to get a wake- up call ask yourself this question “If I had to pay R15,000 for an emergency from my current budget, would I still be able to pay all of my bills?”

Most people would say no. We live way too close to the financial edge; in fact, most South Africans are 2 pay cheques away from insolvency. This means that if they were not able to earn a salary for two months they would find it impossible to catch up on their financial commitments.

This is not a good space to be in, right?

Ideally you want to have at least 3 to 6 months’ salary saved up to offset any financial emergency. It seems like a lot of cash to save but if you make it a priority and go on a savings spree for the next year it is totally achievable. Take the time to analyse your spending habits, identify the areas where you overspend and start saving. If you have lots of retail accounts pay them off as quickly as possible.

If you don’t have an emergency fund to cover unplanned expenses, you will always burn the credit cards or personal loans. That cycle is difficult to break and unfortunately isn’t going to help your road to financial freedom.

Save for a rainy day. They do arrive unexpectedly.

Until next time.

The Wise About Life team

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