An emergency fund is something very few investors maintain, but it should be a critical part of everyone’s financial planning.
Should we withdraw money from investments in case of an emergency?
It is not ideal to access money from your investments for emergencies. Instead, invest in an emergency fund that can serve your short-term cash needs. Having an emergency fund in place can also protect you from unnecessary debt in the case of unforeseen expenses.
What is the difference between an investment, savings account and an emergency fund?
An investment is generally a long term commitment in the form of something like a retirement.
A savings account will be a medium term investment, ideal for buying a new house, car or your children’s education.
Short-term investments or savings will be for emergencies. You need a good rate and returns, and must be able to access this money at short notice. People tend to forget about emergencies such as being laid off at work, which can have a severe impact on your financial well-being. Therefore, aim to meet the the golden rule of an emergency fund amounting to at least three months’ salary.
What are the pitfalls to consider?
Developing the discipline to put money away monthly, is easier than scraping together a large sum of money for an emergency. It may be tempting to use this money for luxuries or to simply get through the month, but remember that this fund is reserved for emergencies only. It is wise to set it aside in account that requires 24 or 48 hours’ notice before being able to access the money. This will help you resist the temptation and stop impulse buying.
Let’s consider all three types of investments
Make sure you approach your investment and savings strategy with the help of an accredited financial advisor. It’s important to understand all costs associated, consider interest rates and most importantly, the tax implications of each investment.
Always pay yourself first- in other words, invest, save, make provision for your emergency fund, and only then spend money on all your other expenses.
Taking a look at market news
All eyes are yet again on Janet Yellen and her team at the US Federal Reserve Bank, as markets await their announcement about US interest rate changes.
The rand weakened by eight cents against the dollar and the JSE All Share index closed higher at 53 293. A lot of focus will be on the price of Brent crude oil and American markets. Several large companies like Apple, Google’s holding company, and Facebook will make their earnings public this week.