Emergency savings in times of crisis

by Mark Moir - Certfied Financial Planner - Beanstalk Online Investments

The coronavirus crisis is creating chaos throughout the world. Not just because of how quickly the new virus can spread within populations and overwhelm healthcare systems, but the toll it’s taking on people’s financial lives. In the first two weeks of April alone, nearly one and half million South Africans filed for unemployment benefits. Many people are grappling with the reality of being unemployed (or underemployed) without any emergency savings to rely on during this crisis. A Budget Insurance survey revealed that only 19% of South Africans would be able to survive for three months if they were to lose their income.

In hindsight, what would you have done differently financially had you known about the Corona Virus? We certainly do not know when the next catastrophe will occur, but NOW is the time to start planning for it!

Having an emergency fund is a very important aspect of any financial journey to be well prepared for any financial surprises.

What is an Emergency Fund?

An emergency fund is money you set aside for when an emergency upends your world and you need money to do what needs to be done. These emergencies would include small items such as a car accident, a hospital visit or a leaky roof, as well as large events such as a pandemic.

Having an emergency fund gives you the peace of mind to know that should something truly awful happen, such as losing your job, you can worry about how to deal with the emergency itself and not worry about how you’re going to survive financially.

Why you need an Emergency Fund?

So now that you understand what an emergency fund is, you may be thinking that they’re great for other people but you don’t really need one right now.

Unfortunately, everyone will likely face at least a few financial emergencies in their life. Here are a few examples that should help you change your mind so you start building an emergency fund.

In case you lose your income

While most people think about being fired, that’s not always the reason you end up losing your income. What happens if you suddenly find out you need to move across the country to help care for a family member because they are ill?

What would happen if your company can no longer afford paying your salaries as a result of a sudden pandemic that has engulfed the world?

What would happen if the economy suddenly crashes over the next six months and your line or work is no longer in high demand? These are all real situations that could happen to anyone.

Medical emergencies

Of course, emergency funds don’t just cover you in the case of job loss. Other major financial emergencies can pop up as well. You may have to be hospitalised and have to pay your and a large of money is required for your stay in the hospital.

These things happen more often than you’d hope and can destroy your finances if you don’t have the cash sitting in an emergency fund to help pay for them.

How much should your Emergency Fund Cover?

While a person’s emergency fund will vary from situation to situation, most financial experts agree that a fully stocked emergency fund should hold between three to eight months of monthly expense. If your job is in a fairly stable profession or industry, you could stick with three-months’ worth, but if your circumstances are less predictable, it’s better to have at least six months of expenses covered.

The amount should account for rent or bond payments, life assurance, utility bills and anything else essential to keeping your family afloat.

Where should I keep my Emergency Fund?

You should set your emergency fund aside in a money market account. It should be kept separate from your other assets and it shouldn’t be highly accessible. It often makes sense to keep your emergency fund separate from your main bank accounts. That way you won’t be tempted to dip into your emergency fund for everyday expenses.

Why don’t I invest the money in the Stock Market and see it grow?

Stock markets are volatile. Investing in stocks is a great option for money that’s going to be in savings for a long time, but you never know when you’ll need your emergency fund. If your money is tied up in the stock market, you run the risk of needing the funds when the markets are down and being forced to liquidate your investments before you’ve had a chance to recover your losses. When disaster strikes, you need liquid, sure money.

All too often, when a person gets sick or loses their job, their finances also take a hit. Not only do they have to deal with the physical or emotional pain of their situation, but they also have to shoulder financial burdens. Without funds to fall back on, their stresses compound.

Having an emergency fund ensures your finances will be secure, even in the most trying times. When you’re going through difficult life events, the last thing you want is to worry about money. Even if you have to cut back on your spending now, it’s worth it to have peace of mind when things in life go wrong. An emergency fund is your family’s safety net, which makes it integral to any healthy financial plan.

If you don’t have an emergency fund, you need to start building one today. Even if you start at R500 per month, at least it is a start. Click here to start your ‘Future COVID Emergency Fund’

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