An emergency fund is money you have set aside in case of emergencies. It covers unexpected expenses and/or emergencies you may face.
Why it is important to have an emergency fund
It is necessary to have an emergency fund because no one knows what the future holds, but we all know that emergencies can — and often do — occur. Having an emergency fund can help one pay for emergencies and unexpected expenses without having to borrow money. This includes borrowing money from friends, family, the bank, and loan sharks (eek!). In some cases, having an emergency fund can prevent one from having to liquidate their investments (e.g. sell their ETFs and shares). In severe cases, having an emergency fund can prevent one from having to withdraw funds from their retirement.
Definition of an emergency fund
According to Investopedia, an emergency fund is defined as "A readily available source of assets to help people navigate financial dilemmas, such as the loss of a job, a debilitating illness, a major repair to home or car — not to mention the kind of major national crisis the coronavirus pandemic has created."
Purpose of an emergency fund
Simply put, the purpose of an emergency fund is to improve one's financial security "by creating a safety net of cash or other highly liquid assets that can be used to meet emergency expenses."
What expenses an emergency fund can cover
An emergency fund can cover any of the following expenses:
- medical expenses
- major home repairs
- major car repairs
- income for 3 – 6 months
- anything you can think of
The thing is, an emergency fund can cover anything you deem an emergency expense.
Someone who does not have a car will not have to pay for car repairs, but they will probably pay for unexpected increases in public transport fares.
As with a budget, an individual's emergency fund will not necessarily be the same as the next person's. This means that emergency funds differ per person because our circumstances are different. The budget for my emergency fund is not a lot, because I do not have as many responsibilities as, say, a married father of three.
What I can say for sure: is that not budgeting for an emergency fund can disadvantage you.
A fellow student could not buy the prescribed [redacted] textbooks because she had to pay for a replacement of the battery of her car. I overheard this conversation she had with another student while waiting for our [redacted] tutorial to begin. This was in 2019.
Kindly note: I was not eavesdropping. She said this loud enough that everyone in that tutorial venue could hear her. I was seated behind her and her friends and overheard this conversation.
When I look at the textbook list for [redacted], the prescribed textbooks cost approximately R1 689.
I found it unfortunate that my peer could not afford to pay for both the battery of her car and her [redacted] prescribed textbooks. The library had those prescribed textbooks available, so it was not the end of the world. However, one of the textbooks has different laws and regulations in it that one has to refer to in tests and examinations. The nature of the course is such that it is beneficial to have that particular textbook on hand to use (i.e. highlight, flag and underline) when completing tutorials.
That event reminded me how important it is to regularly save money and have an emergency fund. To be fair, I do not know her financial situation or her socio-economic background. Therefore, I think it would be rude to question why she didn't have extra money to replace her car's battery and buy her textbooks.
I'm sharing this story to highlight the importance of having an emergency fund.
Another anecdote would be the time I accidentally dropped someone's calculator, and the part where the batteries are housed broke off. It was one of those Casio scientific calculators like the one below.
 |
| Photo by Calculator Shop |
Because I had money in my emergency fund, I was able to buy a new calculator with no worries. The person whose calculator I damaged was using the calculator to prepare for exams. If I was not able to replace the calculator the person's studies could have been negatively affected.
If I didn't have money in my emergency savings account, I may have had to borrow the money from somewhere. Who knows?
It's not helpful not having an emergency fund. Failing to save or provide for emergencies can negatively impact one's finances. When an emergency does occur:
- One may be tempted to get into debt; and
- If one already has debt, it can increase the debt one has as they may borrow more (money).
 |
| Source: Debt Rescue |
Let's move onto something less gloomy: the benefits of having an emergency fund.
The benefits of having an emergency fund
There are several benefits to having an emergency fund, namely:
- Peace of mind
- Less reliance on debt
- Ability to pay for emergencies
Peace of mind
According to Old Mutual's Savings and Investment Monitor COVID-19 Special Report, 58% of respondents "feel highly stressed about their financial situation." The report indicates that "this is up by 20% since 2019." The increase shows that more people are worried and stressed out about their finances. This could have been exacerbated by people's concerns about their livelihoods in the midst of the COVID-19 pandemic.
When you are financially secure (and have money set aside in case of emergencies) there's a level of peace of mind you experience, as opposed to experiencing financial strain. This comes from knowing that you can take care of emergencies as and when they arise.
Less reliance on debt
People who have an emergency fund are less reliant on debt because they have money saved up to pay for these emergencies.
When one has an emergency fund this fund may become their first port of call when addressing a financial emergency. This can help to avoid having to take out loans or covering expenses with a credit card.
Ability to pay for emergencies
As the heading suggests, a benefit to having an emergency fund is being able to use it to pay for emergencies.
Given that 52% of South Africans are unable to "cover an unexpected expense of R10 000," it is clear that many South Africans are unable to pay for emergencies. Being able to pay for emergencies helps to achieve the two benefits stated above: peace of mind and less reliance on debt.
Wrap-up
While emergencies are a random, yet given feature of our lives, they do not need to knock us off (financial) course or lead to our financial ruin. I hope this blog post was informative and helped you understand the importance of emergency funds.
Thank you for taking the time to read this blog post.
Much love,
No comments: