How to set up an emergency fund

Step 1

How to set up an emergency fund

Hi there. In this short blog post I’ll rough out my own emergency fund, hopefully giving you a good example of how to tackle yours. Then, in the next week or two, I’ll set the fund up properly, and give you a review of the entire process. So let’s dive into planning an emergency fund. I started by having a second look at this article.

Start with a multiple of monthly expenses

Now I’m going to get slightly dodgy on the numbers here, as I’m not so open a person as to tell the internet about my salary, etc. So I searched for “Creative Director South Africa Salary”, and got sent to payscale, which pegs the median salary for someone in my position as R339 664 per year.

I’m going to use that figure for my calculations. I’ll keep my expense vs. income ratio the same as it is in real life though, about 55%.

And right now that’s a bit of a guess, because I haven’t finished recording all of my expenses for this month.

Get on with it

Right. R339 664 per year equates to R28 305 per month.

55% of R28 305 is R15 566, but let’s call it R15 500 because maths is difficult enough already.

So the WellSpent editors recommend a base of expenses X 3.

R15 500 X 3 works out to R46 500.

Forever a loan

Am I in a relationship? Not as far as I know. I don’t have anyone else’s income to lean on, but I also don’t have anyone I need to take care of.

(effect on EF = zero)

Job security

I feel like my job is pretty secure, so I’m not going to increase my emergency fund to compensate. I also don’t think it’s so secure that I can decrease it.

(effect on EF = zero)

Working for the man

I work for a company, so I have some paid sick leave as a buffer if I get a little ill. Nothing chronic. Something like…chickenpox. (effect on EF = decrease)

My salary is my only income , so that makes me more vulnerable.

(effect on EF = increase)

Home free

I don’t own a property or any other asset that requires capital every once in a while. Like a yacht. Have you ever listened to a yacht when everything else is quiet? If you listen closely, you can hear them disintegrating in the sea air and salt water.

(effect on EF = decrease)

Dependents

I don’t have any pets, kids, or other dependents.

(effect on EF = decrease)

Car trouble

I just bought a car, and it’ll be slightly more expensive than your average vehicle to fix.

(effect on EF = increase)

What’s it all add up to?

So I’m looking at a very generic, vanilla EF here. With R46 500 I can take care of most car repair issues, and survive for three months without a job. If I got a pink slip and cardboard box for my stuff today, I’m pretty confident I could find another job within three months, although it might not be a creative director position.

So there’s my Emergency Fund: R46 500 that I plan to invest in an Allan Gray Money Market fund, where it will be readily available for emergencies, but will earn enough interest to avoid being eaten by inflation.

Are you ready for an emergency?

How big is your ideal emergency fund? Your situation might be more complicated than mine if you’re married, have kids, have multiple income streams, or have a boat.

Do you have a yacht? Can you hear it…slowly sinking?

If you haven’t already worked out your Emergency fund, I recommend you go through the exercise. Then get out there and open up a Money Market account to get it started. I’ll take you through my experience of the process in an upcoming blog post.

Good luck! Stay away from yachts!

 

(Authors note: I hate yachts. What kind of transportation basically tips over when it’s working?)

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