• Nirdev Desai, Head of Sales at PSG Wealth

In case of emergency

No one could have predicted the unfolding impact Covid-19 would have, and each of us is experiencing it in some way. The economic disruption, experienced to various levels almost everywhere around the world, has revealed just how lucky the ones are who have some emergency financial reserves to lean on. For many of us, it has highlighted that we have not prioritised saving and investment as we should have – and therefore do not have the emergency reserves in place that we need.

While many people’s livelihoods have been impacted, others are fortunate enough to still be earning an income. For those who are able to maintain living expenses and keep food on the table, a first step to ensuring your future financial security is putting a financial plan in place. It is possible to build an emergency fund, even at an uncertain time like this.

Here are some tips to get started.

Set a ballpark

While this can be difficult to determine what you’ll need, or may seem impossible to reach your targeted amount, knowing where you are going is an essential first step. The rule of thumb for an emergency fund is to save 3 to 6 months’ living expenses. For some of us this will be less than for others, and you can also take a hard look at your essential spending to determine what an average month’s expenses look like, and where you will be able to save in future, when needed. You may realise that prioritising savings now to secure your future financial security, may require you to adjust the way you have been living until now. This can be a sobering realisation, but the lockdown period has also removed many of the socialising and entertainment expenses we would normally incur. Use this period to your advantage, but balance this with the need to help others who have not been as fortunate as you.

Make it manageable, keep it liquid

Bite sized chunks (or small contributions) towards saving for your emergency fund are easier to manage than a huge amount in one go. The very purpose of having an established emergency fund will mean being able to manage a large, unexpected expense, or being able to live off the money for as many months as it lasts, without needing to go into debt. Therefore, you need to ensure you can easily access the money when needed, and that you can be sure of the value you are able to access in times of need. For this reason, more liquid investments are better suited to the purpose than more volatile ones. However, remember that cash type-investments are not suited to long-term investments (where you want your capital to grow). Getting the balance right is important – over allocating to your short-term savings pot can impact your ability to grow your wealth in the long term.

Practice perseverance

It does take time to build up an emergency fund, but it’s the small amounts, with the magic of compound interest, that help to add up to significant savings. Accepting this is a process that calls for patience will make all the difference to your outcome. With online shopping opportunities abounding, those who have some extra money could be tempted to spend a little extra on some nice-to-haves. While it is important to enjoy the little things, not spending money on all of them in favour of boosting your emergency fund makes you more resilient to the costs of the future. Don’t let an online sale derail you.

Picture the problem

Every time you feel discouraged, remind yourself why you are doing this. There are countless reminders online or on television that prove how fortunate some of us are, especially compared to others who are less so. Financial distress can be almost crippling, and having to go into debt, arrears or to simply go without something you need is a terrible position to be in, especially when the whole world seems chaotic, like it does with Covid-19 in the background. Being in the privileged position to be able to save for what comes next is a real blessing.

Get some insight

If you’re not sure where to place your emergency fund, such as which product is best, this is a great time to reach out to your financial adviser, or to seek one out. Remember that your emergency fund is just one piece of your financial wellness puzzle. To build long-term wealth, you need a holistic plan. An adviser will be able to assess the best place for your savings, based on your unique circumstances and can help you see the bigger picture for your financial plan.