Every financial plan should start with an emergency fund. Even if you have debt, before you start focusing on accelerating those repayments you need to first build up an emergency fund. An emergency fund is what will stop you going back into debt.
Ideally, you should build up three months’ worth of expenses, but that takes time and commitment. At the very least you should start with R10 000 and build it up as you get bonuses or extra cash.
An emergency fund needs to be accessible, but not too accessible, otherwise you may be tempted to use it for non-emergencies.
The worst thing you can do is leave your emergency fund in your current account. Apart from easy access, you will be earning no interest. You need to select a separate investment account that earns a better rate and keeps the money separate from day-to-day expenses.
To keep your banking simple, it is easier to select the right investment account with your bank. Rates depend on how much you deposit and how long you lock it in for, so it is important to do your research on the best solution for your needs.
You could keep the money in an investment account which is accessible within 24 hours. This would allow you to access the funds for an emergency that requires money straight away, but in most cases, we have some time to pay the bill.
In that case, a seven-day notice or even 32-day notice provides a good solution by providing both a higher interest rate and some distance between you and your money. A one-month fixed deposit is also an option as you can then roll it over at the end of every month if you do not need the money.
One of the best options is a flexible fixed deposit where your money is fixed for a period, but you can access some of the funds immediately.
This would be ideal once you have built up a larger emergency fund of at least R20 000, as half would still be accessible within 24 hours. Absa has an interesting option where you can access any percentage of the investment, but the interest rate changes accordingly.
You also need to consider that fixed deposits do not necessarily allow you to add to the balance during the fixed term. In this case you would want to build up a balance in a shorter-term investment and transfer to your fixed deposit at the end of each notice period.
We did some research on what the banks are currently offering for short-term deposits. This is based on a balance of R10 000. In most cases, interest rates increase for higher balances.
We found that African Bank has very high interest rates as they are focused on raising deposits. You need to do the maths to see if an extra 2% on R10 000 (R200 per annum) is worth opening a separate bank account.
The rates do not increase with higher balances as is the case with other banks, so the differential narrows the more money you have to deposit.