If the pandemic has taught us anything, it is the importance of having emergency savings in place – especially if you own your own home. Putting aside money each month in a contingency fund will provide homeowners with a financial cushion to prevent disaster when a crisis strikes.
According to Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, there are emergencies that happen to the house itself, such as roof repairs or rising dampness, and then there are the financial emergencies that affect you as the homeowner, such as job loss or a cut in salary.
“The question you need to ask yourself is if something like this happens, would I still be in a position to afford the home? For most, the answer would probably be no, which is why a contingency fund is imperative as a homeowner. While the idea of putting money aside can be a daunting task, especially with the constantly rising cost of living, the consequences of not having a financial cushion to fall back on will be far greater. The goal is to have the means to address the changes or emergencies that occur, without it jeopardising the homeownership or placing you under severe financial pressure,” he explains.
To help homeowners create their own, Goslett explains the three basic steps required to create an emergency fund that will provide a safety net for any obstacles that are yet to come:
Set incremental savings goals
As a bare minimum, aim to save approximately one month’s salary. In an ideal situation, three to six months’ income in savings is preferable. A six-month financial cushion should see you through most crises that arise. That said, saving up half a year’s worth of income is not an easy thing to achieve and will take a long time. Setting smaller goals along the way will ensure that you maintain focus and stay motivated.
Select a savings vehicle
When setting up a long-term savings vehicle, it is important to select an interest-bearing account that is separate from your regular banking so that you are not tempted to dip into it for non-emergency related expenses. Interest rate returns vary from one account to the next, so it is important to conduct some research to find the right product that will yield the greatest return. Often the savings accounts with the highest interest rates will require the account holder to lock their money away for a certain fixed period – this could be problematic if you require the money in an emergency but can be helpful if you are the type who struggles to resist the temptation of having money readily available.
Automate the savings
Avoid creating the option not to contribute towards your savings fund by setting up a debit order or automatic payment each month. If a predetermined amount of money is transferred into a savings account automatically each month, it takes the decision-making process out of the equation and ensures that a contribution is made towards the contingency fund regularly with very little effort on your part.
“Setting money aside each month is the best way to prepare for an emergency without being forced into debt or having to face a situation where the bank can repossess your home. Though it is never easy to make room in the budget for savings, the cost of avoiding it far outweighs the temporary discomfort of tightening your purse strings when times are going well,” Goslett concludes.