Here’s why you need an emergency fund – and it’s not to buy new golf clubs

We hear a lot about emergency funds these days and if we learnt anything in recent years, it is how important it is to have in case of just that: an emergency.

John Lennon reportedly once said, “Life is what happens to you while you’re busy making other plans.” Therefore, to ensure you do not run into trouble when life gives you financial lemons, it is good practice to start putting money aside in an emergency fund.

Robyn Laubscher, advice and product specialist at PSG Wealth, says to be clear, this is not for that holiday you have always wanted to go on or that new driver that is on sale at the golf shop. “These funds serve as a financial safety net, providing individuals and families with a buffer to tap into when facing unforeseen circumstances, such as a medical emergency, losing your job, car repairs or other urgent needs.”

Some of the key features of an emergency fund to consider include liquidity, keeping it separate from other funds, the size, purpose and a regular review.

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Emergency fund must be easy to access

Liquidity is important, as the nature of the fund dictates that the funds must be easily and readily available. Investing in a low-risk cash-like fund could be very beneficial. These types of funds generally have low fees, offer reasonable growth for the level of risk associated with them and are easy and quick to access.

Laubscher says it is also important to keep your emergency fund separate from your regular savings. “You must keep your emergency fund separate from other investments. It is reserved for unexpected events. Do not blur the lines between the holiday you are saving for and your emergency fund. They should be two separate investments, as they each have very different goals.

The size of your emergency fund will vary depending on your individual circumstances, such as monthly expenses, income stability and potential financial risks, she says. “The general recommendation is saving three to six months’ worth of living expenses in this fund.”

Laubscher points out that the primary purpose of an emergency fund is to provide financial stability and peace of mind during challenging times. Having an emergency fund means that you will not need to rely on high-interest debt or liquidating long-term investments to cover unexpected expenses.

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Regular contributions and review also important

Regular contributions are also important. Rome was not built in a day and Laubscher says the same applies to building an emergency fund – it does not happen overnight. “Contributing regular amounts over time until the desired goal is reached is the easiest way to build this fund.”

She says you must also review your fund regularly. Your emergency fund forms part of your holistic financial plan and should therefore be monitored on a regular basis, just like the rest of your portfolio. As soon as funds are used for an emergency, there should be a plan in place to replenish it.”

“An emergency fund is a cornerstone of holistic financial planning because it provides security, stability and flexibility when faced with life’s uncertainties, allowing individuals to navigate challenges and pursue their long-term financial goals with confidence,” Laubscher says.

She recommends that you reach out to a financial adviser to help you make holistic financial plans and give you tools that can help you build up your emergency fund.