A financial plan to help you weather the surprises in your life
Life is full of surprises and along with these can come new financial needs that we may not anticipate. Unfortunately, many of us don't fully recognise the impact these small life events can have on reaching our long-term savings goals. You need a robust financial plan that can also help you weather the unexpected events in life.
Emergency expenses come in many forms, so it might be more practical to think of your emergency fund as a ’life will happen’ fund, because life often happens when we are busy making other plans. If you haven’t even thought of starting an emergency fund, or yours needs some serious topping up, it’s never too late to get back on track.
A crash course in planning
The core reason for having an emergency fund is to make sure you have some easily accessible money, should you need it in a hurry for an unforeseen event. We can’t deny that financial accidents are somewhat unpredictable but being ready to face them puts you in a powerful position. An emergency fund is just that – a powerful weapon to keep your plans in place, no matter what life throws at you. Pandemic living has definitely reshaped our relationship with money, and while you can’t plan for everything, it is nice to know you have a contingency plan in place for when things might go wrong. The rule of thumb is to have an emergency fund of 3 to 6 months of your take home income.
Compound interest can celebrate or cripple your plans
Small amounts of saving can really add up, especially if they are earning good interest and you allow them time to grow. Many people rely on debt to fund unplanned expenses, but unfortunately, debt repayments can have the opposite result when it comes to building long-term wealth, in that your debt adds up the longer you avoid paying it off in full. Both savings and debt attract compound interest and it either works for you, or against you, depending on how well you plan and how disciplined you are. Of course, debt with high interest should be eliminated as quickly as possible, but saving just a little along the way will go a long way too. The key is to make a start sooner, rather than later.
Keep in mind that once you handle an unexpected expense, it will be necessary to reassess your financial plan and make changes to put you on top of life’s next curveball, ahead of time. Your emergency fund will need to be replenished.
Choose an investment option that suits your savings goal
Depending on your needs you can consider a combination of different products to help meet your needs, but it is important to consider a product which is accessible at short notice without incurring any penalties. While a bank savings account can offer liquidity, it is unlikely to offer you a material return on your investment. The key is to find a solution that offers flexibility, but also allows for some growth on your investment, without incurring too much risk.
A voluntary investment product that allows investment into unit trusts, is a good option as there are no restrictions or contributions or withdrawals. Most providers offer a range of funds to choose from, and your money is often available within two to three business days (depending on the providers’ rules).
A tax-free investment is also a good way to grow your capital over time, but especially if you expect you won’t have to tap into your emergency fund for a while longer. All investment returns in this product are exempt from tax. Like a voluntary investment above, you can access a wide range of underlying funds. You can contribute a maximum of R36 000 a year or R500 000 over your lifetime, but once you withdraw money from the investment, you cannot replace the contribution amounts at a later stage.
Whatever product you use to save for your emergency fund, it is important to ensure your choice of underlying fund is aligned to your savings goal: you want to opt for a lower risk fund that offers you some growth, but at low volatility.
Good advice is priceless
Working with a financial adviser will do wonders for the longevity of your plan, as these are specialists who know where you should be investing based on your goals. They can also help you to assess your plan holistically, ensuring it is well positioned to help you achieve your long-term needs and goals. Having an emergency fund in place is an important first step to getting your holistic plan in place, as it can help to ensure your other plans remain on track in the event of a financial emergency.
By Jan van der Merwe, Head of Actuarial and Product at PSG Wealth