Johannesburg – We’ve all heard the expression “saving for a rainy day”, which suggests a future time of need that may never come.
But the reality is no one can predict the future and by having no extra funds to pay for an unforeseen expense, you leave yourself extremely vulnerable to falling into a debt trap.
Given the rising cost of living in South Africa, bank balances that run dry every month could start becoming a regular occurrence, leaving no shelter from unplanned expenses, never mind big financial emergencies.
Having an emergency fund is one of the ways to avoid descending into debt when you run into trouble or an emergency creeps up in your life or that of a loved one dependent on you.
Financial service group Sanlam advices on which steps to take to avoid financial ruin when emergencies come knocking.
Step 1:
Understand Where Your Money Goes To avoid running into any big emergencies or debt, you first need to gain a better understanding of your spending habits.
Start by writing down what you spend your money on every month – even the smallest expenses – and then split it into debt repayments, essential expenses and non-essentials like eating out, take-away coffee or subscriptions.
Decide which of the non-essentials are important to you and what you are willing to give up. Once you’ve taken a hard look at your non-essential expenses, you might be able to cut back and start saving money for a rainy day instead.
Step 2:
Reassess Your Debt Very few people realise how much money they waste on debt-servicing costs each month.
If you’d like to repay your debt first, try to increase the repayment amount and start using debt effectively.
This means sticking to good debt, like the bond on your home or your study loan, and using cash for other expenses instead of relying on credit or store cards. You pay high interest on short-term debt, so make it a priority to reduce it.
Step 3:
Create a Realistic Budget While you need to make allowance for savings, you also need to budget for things that you enjoy, otherwise you run the risk of spending money you don’t have.
If you budget for non-essential expenses, you can make adjustments to your other monthly expenses.
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