By Gary Fisher, Certified Financial Planner and Head of Member Education Services at Alexander Forbes

Setting up a separate fund that is earmarked for life’s little emergencies should be an integral part of any financial plan. An emergency is loosely defined it is a sum of money that is readily available to deal with unforeseen expenses such as car repairs, medical co-payments or a burst geyser.

Many people start saving or investing for the long term and commit to contractual savings plans that lock them in for specified periods without giving much thought to the purpose of the investment. If, for example you are saving towards your retirement, then committing yourself over the long term makes sense as you will only need the accumulated savings at a pre-determined date in the future and your money will have time to grow into a nest egg available to you when you are no longer working. But what if life happens along the way and you need some of your savings to pay for an expensive car repair? The last thing you want is to access your long term savings, as there may be financial penalties or charges, and in the case of your retirement fund, tax consequences as well which will negatively impact on the amount of pension that can be expected when you retire.

The savings vehicle that you choose for your emergency fund should be liquid or easily accessible and needs to contain at least three to six months’ salary which is saved up over time and is only accessible for emergencies. In South Africa today, despite widespread tax incentives, our household savings rate has remained stubbornly low. One reason for the low level of savings, asserted in the 2018 Benefits Barometer thought leadership report published by Alexander Forbes, are the low levels of trust in financial institutions and the products that they offer.

South African financial institutions have a huge part to play in building trust with their customers. A critical part of this process, according to the Benefits Barometer, involves taking care to understand the real needs of these customers and to meet these needs as effectively as possible.

One possible solution mooted in Benefits Barometer is to include an emergency savings solution as part of an employee benefits framework. The idea behind such a solution would be to leverage the power of compulsory long-term savings (retirement savings) to help employees meet short term needs such as emergencies or other short term savings goals. This solution gives employees a sense of immediate value as they experience the benefits of savings throughout their lifetimes.

The solution could be member driven or employer driven or a combination of the two. If we consider an employer-driven solution, a where a company decides to use retirement savings to provide for an emergency savings plan for its employees without impacting on the retirement income objectives.

The way a company could achieve this would be to reduce retirement savings for younger members of the fund and a redirect a portion of their contributions to an emergency savings plan. Over time the accumulated savings in the emergency savings plan will grow. To compensate for the lower contributions that members make to the retirement fund when they are young, their contributions automatically increase as they get older. This can be done at salary increase time to limit the immediate financial impact on take-home pay.

The benefit of this solution is to put the member of the fund in a better financial position at retirement while allowing access to their savings as these little emergencies present themselves during our lifetimes. This approach will help improve preservation of retirement benefits, which will in turn increase retirement outcomes for many South Africans.

When putting your financial plan together, consult a certified financial planning professional and discuss the need to set up an emergency fund within the confines of your financial plan. Over 4 000 certified financial planners countrywide carry the trademarked CFP designation, affiliated to the Financial Planning Institute of Southern Africa.


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