Yesterday I told you how the rain in Cape Time reminded me of the 2017/18 drought.
When the drought hit Cape Town and water restrictions and tariff increase are implemented, people started buying tanks. People were serious about “harvesting rainwater.” Some people started drilling for water in their backyards and some people, like my neighbour, had tanks for years.
We needed water for an emergency!
As I am writing, we are still in a lockdown situation due to Covid-19. Daily I hear about people who are retrenched. Small businesses closing down. It is really sad and depressing.
The people with the least Covid-19 stress, are the people without debt and with savings.
Proper financial planning suggests an emergency fund of 3 to 6 months of fixed expenditure. Money to buy food, pay rent, rates and taxes, insurance, medical aid. Money to sustain your life when there is a crisis.
From experience as a Financial Advisor (which I am not anymore), I know people do not easily accept the idea of an emergency fund. It is just not sexy! You cannot impress your friends with the returns on an emergency fund. Or perhaps it is a false optimism that they will never need it. Or they succumb, without thinking, to generalities like “cash is king” or “cash is not an investment.” Or perhaps it is impatience that it is too slow.
An emergency fund must be in a low risk savings account and easily accessible. That is mostly a bank account or perhaps money market funds. People prefer to go for high returns. Stocks are much more sexy than boring bank savings accounts. The ups and downs of the stock market is exciting! At least you can tell your friends stock Y went from 27 to 124 in a week!
When the crisis hits us, the stock market falls and we can only get access to our money at a loss! Double whammy!
Rather forget about an emergency fund, it sounds boring. Let’s rather build real wealth.
Rather create a reservoir fund, like a water tank. Would you prefer calling it a Spreader Dam? You decide how big that tank should be – about the equivalent of 6 months expenses sounds right. You keep pouring money into that tank. Eventually it starts overflowing. The water does not go to waste. Never. You spread it to best use! It starts filling another tank. Let’s call that tank your Wealth-1 Tank.
Your Wealth-1 tank will overflow into Wealth-2, and so forth.
What Wealth-1 and Wealth-2 is, would depend on your goals and many other factors. That is where planning comes in. See below.
Do you have an emergency fund? If not, imagine how different life would have been during lockdown if you did have an emergency fund? The truth is, with an emergency fund a lot of life’s stresses disappear. Why?
BENEFITS OF EMERGENCY FUNDS
If you have an emergency fund:
- You have a goal and plan – it helps to bring certainty;
- You have discipline – you are building your wealth month-by-month or week-by-week. Any setback will not easily ruin your financial plan’;
- You will not have consumer debt if you have an emergency fund! Having an emergency fund implies a prudent money philosophy. You know where you want to go and you are on top of your finances.
The biggest single benefit of an emergency fund, is that it requires a wealth mindset! That is what will make all the difference! Once you decide you want to break free from a month-to-month-stress existence, you will find the ways to start building your wealth.
What are your thoughts about emergency funds? Please share in the comments.
This is my Disclaimer and my advice. I am not giving advice.
Any financial advice or planning that is ad hoc, piecemeal, random, haphazard, is not advice and not planning! It is a recipe for disaster. That is why you should not react to a single post, like this one.
Financial planning is a holistic process – stick with me and I will show you over time. But the process starts with setting goals, making plans, implementing the plans, evaluating progress and adjusting as circumstances change.
The worst you can do is to chop and change with every new idea or thought – like a ship in stormy seas being driven this way and that by wind and waves.
You might want to visit this post, too.
Here is my advice: if you like what I say, find a financial advisor that you can work with, and work with him of her to achieve your goals.
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