Last week, the South African Reserve Bank (SARB) announced more relief for distressed consumers in the form of a rate cut, bringing the interest rate down to 3.5%. The South African Reserve Bank had already cut rates by a cumulative 300 basis points over the past year, 275bps of those in reaction to the Covid-19 crisis. This intervention is geared at supporting the economy, which has been weakened by a nationwide lockdown aimed at curbing the spread of the virus.
There’s no doubt that the Covid-19 pandemic is hitting the South African economy hard, and we’re likely to feel the sting for some time to come amid daily reports of job losses. This is according to Elize Botha, Managing Director of Old Mutual Unit Trusts, who urges South Africans to keep monthly expenses as low as possible and, where possible, use the savings from the rate cut to bolster their emergency funds.
“With interest rate savings of 3%, South Africans will now more than ever be relieved to have a little extra cash at the end of the month as the country continues to battle Covid-19,” says Botha.
“The situation we find ourselves in as South Africans is really tough and the reality is that many people are struggling. If at all possible, we must remain focused on what we can control and use wisely whatever savings avail themselves during this time.”
She says South Africans should seek every possible opportunity to save and put money away to avoid going further into debt for unplanned expenses. “If you don’t have an emergency fund in place, use the saving from the interest rate cut to kick-start a nest egg earmarked for unexpected expenses, such as medical costs or a sudden loss of income,” says Botha.
“No-one likes to think about all the things that can go wrong in life, but you have to make sure you are financially prepared for emergencies. If there’s anything we’ve learnt in 2020, it’s that anything can happen. And when it does, it really pays to be prepared,” says Botha.
Botha offers five tips to secure your emergency fund.
1. Have a goal with your ‘rate cut savings’
Ideally, your emergency fund should be of a value of between three and six months of your salary. Set this value as your goal, and use any funds you are able to save to reach your target. “It is understandable that the thought of when you will reach your goal may be overwhelming — but remember, the most important thing is simply to start. Start with what you can,” says Botha.
For those whose employment has not been materially affected, there is also the opportunity to use the potential savings from working at home under the lockdown – no commute, no takeaway coffee, and more economical meals cooked at home – to start your emergency fund.
2. Keep your emergency fund separate from your current account
The best place to keep your emergency fund is in a separate account from your day to day spending so that you are never tempted to dip into it. Remember that this fund is different from saving for a holiday, for example, and should be used for unplanned expenses; not that last-minute sale on holiday packages to Phuket.
3. Put your money in an accessible place
The third step to securing a cash cushion is to ensure that it is accessible. When selecting a vehicle to put aside this money, you must read the terms and conditions. Ensure that the money is available almost immediately and that you don’t pay penalties to access it in an emergency.
4. Don’t keep emergency savings under your mattress
Emergencies are unforeseeable by their very nature, which is why it makes sense to opt for a low-risk, short-term investment vehicle for your crisis fund.
Keeping money under the proverbial mattress doesn’t mitigate the risk of inflation, which is the steady increase in the cost of living that undermines the buying power of your cash over time.
Unit trusts are designed to reduce the risk of inflation because funds can be spread across different asset classes, making them stable and allowing your investment to outpace the steady increase in the cost of living.
5. Ensure your emergency fund is secure
Unlike your mattress, unit trusts are secure in that they don’t form part of the balance sheet of the financial services provider, making them ideal during an economic downturn.
“In the current economic climate, building an emergency fund may not be top of mind. However, it is important that those who are in a position to cut costs and put money away look at where they will be benefitting from the interest rate cut and do so,” concludes Botha.
“As an investor, you always have to navigate your current context with your long-term financial goals in mind, and often that entails making sacrifices now to avoid surprises that will set you back years in terms of your finances”.
PERSONAL FINANCE