Research suggests that South Africa’s sophisticated financial markets have had a negative impact on South Africa’s financial literacy.
“less than 20% of breadwinners have an emergency fund to be able to cover a relatively modest unexpected expense” (source). Unexpected financial shocks “are without prejudice-they can strike any of us at any time” (source). So why are we so unprepared?
An emergency fund is defined as ‘a stash of money set aside to cover the financial surprises life throws your way’. In the past credit was readily available. In more recent times, financial demands have been heavy and prolonged, additionally banks have lost the trust of consumers.
Thus, our attitude to savings and our capacity to save has changed. Costs continue to rise whilst wages remain stifled, most people simply don’t have enough left over at the end of the month to save.
Therefore, for many of us, when life has dealt an unpredictable blow, the decision has been to turn to personal loans, with companies like Wonga, now offering time-bound personal loans online for up to 6 months, it is easy to understand why this is a growing method of emergency funding in tough times.
The long term impact of an emergency fund
Fin24.com suggests that as well as providing a much needed pot of savings, an emergency fund also: provides ‘individuals with the first tentative step towards asset accumulation’ and has a positive ‘psychological impact’ on the saver because ‘we tend to focus on how well we could deal with a sudden financial crisis, rather than absolute levels of wealth’.
Moreover, research suggests that ‘there’s a strong relationship between establishing an emergency savings habit and economic mobility, intergenerational wealth transfer and family stability.’ 1
As a result an emergency fund is a powerful vehicle for financial literacy. As we move away from more traditional banking methods, and financial hardships continue, it is a dwindling area of focus for consumers. However, its widespread benefits are clear to see.
The long term impact of an emergency fund that lasts
So how do you create an emergency fund?
When you don’t have spare cash lying around, creating an emergency fund can seem like a daunting prospect designed to inflict further financial suffering. Therefore, to create an emergency fund, start small. Take a tiny amount from your account every month for your emergency fund. Keep going until you have the equivalent of around three to six months wages.
Whenever you come across an opportunity to save money, add it to your emergency fund, regardless of the size. As you do so, saving will become a habit and your emergency fund will soon reach its target. Don’t be tempted to use it for general expenses though!
Have you got an emergency fund? Or have you got any useful tips for building an emergency fund on a tight budget. We would be really interested to hear your stories.