What happens when disaster strikes? As the uncertainties about our economy continue to rise, it is even more necessary to be financially savvy and build yourself an emergency fund like the big financial players do.
Saving & investing isn't exactly the easiest thing, particularly when you're a student in 2020. Yet amidst the chaos the lockdown has presented us students with some opportunities to secure our financial futures. The reduction in expenses, for those who get a monthly allowance, means an opportunity to build an emergency fund which is a great place to kickstart one’s investment journey.
As daunting as it may sound, it is definitely something that deserves to be an item on your to-do list. I won't even go into explaining why you need an emergency fund, as I’m confident that no one prefers going through the horrible experience of borrowing money from people when your own runs out. I will instead share a couple of tips on how to build an emergency fund:
The first step is to create a budget of your expenses, this will give you an idea of how much you need to aim to save. Financial advisors typically recommend that you save at least 3 months worth of monthly expenses, but you can tune this according to your circumstances. A decent emergency fund target to aim for in the beginning is R1000.
Now, most students don't have R1000 to just throw into an emergency fund straight off the bat, so it's best to build your emergency fund slowly over time (this will also allow you to develop good financial habits), and with lockdown at play, you could contribute a bit extra to your special savings fund. Many banks offer a variety of savings accounts with easy accessibility, which is important because while it may take some time to reach your R1000, the most important thing when it comes to emergency funds is that you can access your money as quickly as possible.
While banks sometimes present the issue of high opening balances for accounts that have competitive interest rates, they offer security for your easily accessible funds that also get the bonus of interest.
Competing financial priorities can limit how much one can contribute to their fund, so a good way to start is just by trying to save one month's worth of expenses first, then moving onwards to saving two months’ worth and so on. For example, if you get R1500 from your allowance, you could contribute R500 towards your fund and keep the remaining R1000 for your monthly expenses.
For the more ambitious people, looking to get more returns than what's at the bank, you could consider a two-pronged approach. Reduce your emergency fund contribution, and put the "new money" into stocks and ETFs (exchange-traded funds). These products generally offer higher returns, whilst also still providing you with easy accessibility. A good place to start this journey is with a TFSA (tax-free savings account), which is a type of bank account that essentially allows you to save, invest, and as the name suggests, watch your money grow without having to worry about SARS eroding your returns with tax. All dividends, interest & capital gains earned in a TFSA are tax-free and can be withdrawn with your savings for any reason and at any time, tax-free. Through avenues such as the TFIA (tax-free investment account) account offered at Standard Bank, and the EasyEquities platform (both available online), you can get an easy start from the comfort of your home.
On the journey to financial wealth, which inevitably starts on the road of financial health, emergency funds act as the insurance package that softens the unexpected blows our unpredictable world is bound to deal to your pocket. Be money-wise and start building the structures that will safeguard your investments, by speaking to a financial advisor today.
Author: Sihle Hlatshwayo