We’ve all heard the expression “saving for a rainy day”, which suggests a future time of need that may never come. But the reality is nobody can predict the future and by having no extra funds to pay for an unforeseen expense, you leave yourself extremely vulnerable to falling into a debt trap. Given the rising cost of living in South Africa, bank balances that run dry every month could start becoming a regular occurrence, leaving no shelter from unplanned expenses, never mind big financial emergencies.
Don’t think of the rainy day scenario as an unlikely one. As the cost of living goes up, your ability to cover additional unplanned expenses reduces if you haven’t set aside an emergency fund. Start from your next pay cheque so you can avoid getting into debt when the next rainy day comes along.
An emergency fund should ideally contain enough savings to cover at least three times your monthly expenses. This will help you to self-fund your day-to-day expenses and meet your monthly debt obligations if you can’t earn an income. While this amount of money might seem like an unrealistic target, a good initial target would be to reduce your expenses to 80% of the income you take home. If you save the other 20% it will take you about a year to build up your emergency fund. The trick is to save or invest that money as soon as you receive your salary, or even better – set up a debit order so a fixed amount goes into a separate savings account automatically. In addition, it’s important to realise that every little bit helps – anything you decide to save each month is better than nothing. The key is to break the hand to mouth pattern, and it starts with getting a grip on your expenses.
To avoid running into any big emergencies or debt, you first need to gain a better understanding of your spending habits. Start by writing down what you spend your money on every month – even the smallest expenses – and then split it into debt repayments, essential expenses and non-essentials like eating out, take away coffee or subscriptions. Decide which of the non-essentials are important to you and what you are willing to give up. Once you’ve taken a hard look at your non-essential expenses, you might be able to cut back and start saving the money for a rainy day instead.
Very few people realise how much money they waste on debt servicing costs each month. If you’d like to repay your debt first, try to increase the repayment amount and start using debt effectively. This means sticking to good debt, like the bond on your home or your study loan, and using cash for other expenses instead of relying on credit or store cards. You pay high interest on short-term debt, so make it a priority to reduce it.
While you need to make allowance for savings, you also need to budget for things that you enjoy, otherwise you run the risk of spending money you don’t have. If you budget for these non-essential expenses, you can make adjustments to your other monthly expenses to allow for non-essentials. The mistake many of us make is to spend a lot of money on little things, which you may not even be able to recall at the end of the month. Make the smart choice – budget your money so you can save up for a real treat.