Emergency fund essential to avoid a Day Zero with your finances

THE CITY of Cape Town recently announced that Day Zero, the day the City was expected to turn off the taps, has been averted – for now. The decision, however, came with the condition that Capetonians continue to implement water-saving and recycling measures throughout this year, because the water crisis is far from over.

Elize Botha, the managing director of Old Mutual Unit Trusts, says the water crisis and the measures to conserve water highlight the importance of having an emergency fund: a stash of money set aside to cover financial surprises that can often be expensive.

She says: “While watersaving measures implemented by farmers and residents were successful in averting Day Zero this year, it has resulted in many Capetonians incurring unexpected costs. For some, that may have meant digging into their hard-earned savings, causing added financial strain.

“The need for the implementation of water-saving measures is unlikely to be one that people pre-empted and provided for financially, yet for Capetonians it became an urgent necessary expense,” says Botha. “Using your emergency fund to absorb unexpected expenses, such as a water tank or greywater system, rather than go into debt is advisable, as you avoid paying high interest rates on credit.”

Financial experts suggest that you should have between three and six months’ salary saved in an emergency fund to handle unexpected expenses, says Botha. “Having cash set aside for this is essential. Rather spend less on luxuries, such as eating out, cellphone data and designer clothes, so that you can put money into a fund that can assist you when an emergency arises.”

Botha suggests using a fund that is separate from day-to-day and discretionary spending – for example, a money market unit trust fund, which is secure, reliable and offers liquidity.

“For long-term investments, we propose growth portfolios, such as a balanced fund, to outpace inflation in the long term, but, for an emergency fund, it is essential to look at three elements: the return you can expect, the stability of the investment and liquidity, as you might need your money at very short notice. A money market fund ticks these boxes. “However, your individual circumstances will need to be considered when selecting the best product for your needs,” she says.

While conceding that the need for an emergency fund depends on personal circumstances, Botha points out that the water crisis is the perfect example of an unavoidable unforeseen expense that affected Capetonians across the board, and which if not dealt with early on, could result in even more financial outlay.

“Emergencies do not wait until you are financially ready; they can happen at any time. Right now, short-term expenditure on water-saving equipment at home is worth the long-term investment of securing our water resources. We may have averted Day Zero this year, but we are still at risk of Day Zero happening in 2019, so we need to continue with our water-saving mechanisms,” she says. – Staff Reporter