The Ultimate Guide to Building an Emergency Fund
According to the 2024 Old Mutual Savings & Investment Monitor, just 4 in 10 working South Africans are prioritising putting away money for a rainy day. Eep! Read on to learn why an emergency fund is an essential part of your investment strategy, and how you can save for one in the Franc app.
What is an emergency fund? ☔
Unless you work in an emergency service industry, it’s unlikely that you wake up every day preparing for disaster to strike. So, naturally, when you receive your income every month, preparation for a rainy day – if and when it strikes – is probably the last thing on your mind. You aren’t alone!
The reality, though, is that the longer you live in denial of the could-bes and would-bes of the future, the worse off you’ll be financially. Enter: the emergency fund, or the cash that ‘rains’ from the sky when you really need it because you saved for it.
An emergency fund is a pot of savings that you hope you’ll never have to use, but will be happy you saved towards when that rainy day arrives. And trust us: it almost always does, even if not in the shape or form you imagined.
The fund provides welcome relief when you need cash to weather life’s storms, whether that be a loss of income, or a large surprise expense. In the case of a loss of income, an emergency fund should be able to cover your fixed and essential expenses (those big-ticket items like rent, medical aid, car payments etc) until you can get back on your feet.
How much should an emergency fund be? 🤔
Everyone’s financial obligations and income situations are different. You’ll know best how much money saved in your emergency fund will keep you sleeping easy at night.
Plan for the worst, which, if you support yourself, means a loss of your main source of income for an indefinite period.
Here’s a guide to calculating how much your emergency fund should be:
- Figure out your *essential* monthly expenses: If you were to lose your income tomorrow, your basic needs like food and shelter don’t just pause. These expenses need to be covered by your emergency fund.
- Determine how long you’d need to dip into your fund: This will depend largely on the predictability of your income, and whether you have dependants. We’ve included a simple guide below:
1-3 months’ expenses | 3-6 months’s expenses | |
Source of income | Salaried | Self-employed or entrepreneur |
Income frequency | Stable | Seasonal |
Dependants | No | Yes |
At Franc, we always advocate for 3–6 months’ worth of expenses to ensure long-term cushioning and stability.
Finally, multiply your monthly essential expenses (that’s excluding the mani-pedis, streaming services and takeaways 😉) by the number of months, and you have your emergency fund savings target.
Where to save for your emergency fund 💰
The very nature of an emergency is unexpected, unplanned and pressing. Having the funds to manage it should remove the stress of the event, no matter the scale.
Emergencies don’t wait, so your cash needs to be set aside and accessible at a moment’s notice. We also cannot stress enough the importance of separating your dedicated emergency savings from your transactional account.
This is why it’s essential to invest in a fund where your money can easily be withdrawn without fixed notice periods.
The Allan Gray Money Market Fund is a cash fund that offers low risk, with inflation-beating returns – meaning it beats the growth of that bundle of notes you might be hiding in a jar on top of the fridge (which is no growth, btw). It’s also one of the funds you can invest in on the Franc app.
How to start an emergency fund 📲
Unlike your other savings goals – that Bali trip 🌴, new wheels 🚙, or a snazzy kitchen upgrade 🔪 – an emergency fund isn’t something you’ll be excited to save for, but you’ll have no regrets about starting and adding to one. So, where do you start? 🤔
Like with any other savings habit, you need to build it into your monthly budget. Along with those holiday and car savings contributions, add an emergency savings line item to your budget sheet. Using the 50/30/20 rule, 20% of your income should go to savings, so use this as a guide for growing your emergency fund. Make sure your contributions track with the total emergency fund savings target you calculate.
To stick to the habit, set up a stop order from your transactional account to your Franc account on payday so that you can rest assured your fallback is in place should the unexpected strike!
When should you tap into your emergency fund? 🏧
Your emergency fund is there to serve as a cushion for a fall. And, no, not fall-ing in love with that pair of shoes, or that one-off deal on a home entertainment centre. We’re talking about the hard knocks that really set you back if you don’t have the funds to bounce back from them.
What does a ‘rainy day’ or hard-knock emergency look like?
⛈️ An unexpected loss of income
⛈️ A hospital admission without adequate medical aid
⛈️ Insurance excess on a car accident
⛈️ A burst geyser
⛈️ The cost of replacing essential tech, like a cell phone or laptop
Here are a few examples of what an emergency does not look like:
😎 A Seychelles holiday
😎 A new wardrobe
😎 The balance on a planned car trade-in
😎 Fire sneakers on sale
Also: take your emergency fund seriously, and protect it. When you have some extra cash at the end of the month, top up your fund to get you closer to your goal instead of spending on more frivolous items that you don’t need. Some day, you’ll thank yourself for what you did. 💪