Is your emergency fund big enough?

An emergency fund is a savings amount set aside for unexpected expenses, such as household repairs or medical costs.

The rule of thumb is to have three months’ worth of take-home pay saved – but is this enough? We ask the experts what amount is sufficient, and what to do if you’re struggling to save.

Tip: Find out more about savings options today.

Why an emergency fund – and how should it be used?

An emergency fund can help you financially when life throws you a curveball, says financial planner and money mentor Terence Tobin.

“The immense benefit of such a fund is that you have cash to pay for emergencies without having to sell assets or go into debt,” he says.

It helps not having to worry about money during a stressful time. However, you shouldn’t think of the credit available on your credit card as an emergency fund, cautions financial planner Sylvia Walker, author of Smartwoman: How to Gain Financial Independence and Create Wealth. Further, you shouldn’t use your emergency funds to cover a cashflow shortage.

“Running out of groceries or electricity a week before payday doesn’t constitute an emergency,” Walker notes. “The funds are there to replace your washing machine if it breaks down a month after you’ve replaced your vehicle’s clutch, for example.”

Although insurance covers multiple emergencies, many of us can’t afford to pay for all the insurance we need, so an emergency fund is a good alternative, says Walker. 

How much is enough – and how can you make a start?

While at least three months’ take-home pay may provide a reasonable financial buffer, it may not be sufficient for all emergencies.

“I recommend having three to six months’ living expenses in your emergency fund, which will allow you time to find a new job or start your own business if you’re retrenched, for example,” says Tobin.

Walker says you can build up your emergency fund slowly if saving is difficult. “Even if you start with R50 a month, every rand you put away is a rand you won’t have to borrow in a crisis,” she points out. 

If you have to dip into the fund, make a habit of topping it up again, and if the amount grows significantly, you can allocate excess funds for festive season gifts or school uniforms, for example.

Tobin says it’s unnecessary to add to the fund unless your living expenses increase significantly. “Do review your fund every couple of years, however, to ensure the amount still covers three to six months of living expenses,” he recommends.

Can you save while paying off debt?

If you focus only on paying off debt, you’ll just fall into debt again in a crisis, says Walker.

Tobin agrees. “Emergencies don’t wait for debt to be paid off, so you need to focus on both strategies,” he says. “Consult an independent financial planner to guide you.”

Where should you keep your emergency fund?

Walker recommends keeping the funds in an accessible bank account. “Open a separate savings pocket, which many banks offer. Keep the funds separate from your current account, or you’ll lose track of the money and perhaps spend it.” 

Tobin suggests keeping the funds in a money market or savings account. “Emergencies don’t give you 30 days’ notice to cash out a fixed deposit,” he warns.

A debit or stop order on your salary will ensure the funds are appropriately allocated. “A debit order isn’t foolproof, however – make sure you have enough funds in your account to prevent it from bouncing,” Walker concludes.

Tip: Use our budget calculator to understand your saving needs better.