How much is enough?

An emergency fund should ideally have enough savings to cover three times your monthly expenses. This will help you to self-fund day-to-day expenses and meet your monthly debt obligations if you can’t earn an income. While this amount of money might seem unrealistic, 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.

Here are Gielie’s steps to help you start saving from your currently stretched budget:

• Pay yourself first: You’ve heard it before, but are you actually doing it? Put money away as soon as you receive your salary. Even better, set up a debit order so a fixed amount goes into a separate savings account automatically. You can use a linked bank account but a flexible unit trust will typically give you better returns than a traditional savings account.
• Get rid of the bad debt: Few people realise how much money they waste on debt servicing costs each month. If you are first going to repay any debt, try to increase the repayment amount. And, if you are struggling to put money away at the moment, the best time to start is when you get an increase.
• Stick to cash (and good debt): You pay the highest interest on short-term debt, so make it a priority to reduce that kind of debt and use cash for other expenses instead of using credit or store cards. The bond on your home or study loan are types of good debt, which can be a secondary priority.
• Track your spending: Write down what you spend money on for a month and you’ll be surprised at how much insight you get into your spending habits. Split your debit orders into debt repayments, essential expenses and non-essentials (like eating out, take-away coffee or subscriptions). You may be able to create room to save once you’ve taken a hard look at your non-essential expenses. You also need to be critical – clothes are essential, but perhaps not those designer labels, and you don’t need to buy something just because it’s on sale.
• Create a realistic budget to make room for a treat: 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 on such things without actually budgeting for them. At least if you budget for them, you can make adjustments to your other monthly expenses upfront. 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. Rather use your money to save for a real treat.
• What can you ditch? Decide which of the non-essentials are important to you and what you are willing to give up. For example, you can skip the morning cappuccino and drink the coffee that’s available at work, bring your own lunch to work, and review your cell phone plan to use Wi-Fi calling options instead.

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. The best time to start is from your very next pay cheque.

If you have a specific amount you want to save towards, Sanlam’s Smart Invest will help you calculate how much to put away each month. You can also track your money 24/7 to see how it’s performing. Get started now and build your first investment portfolio for a rainy day.