By Dominique Bowen
When it comes to South Africans’ state of personal emergency savings, the picture is pretty grim. FNB research findings released in May this year show that less than 6% of the bank’s middle-income customers – those earning between R15 000 and R42 000 a month – have emergency savings that would tide them over for three months or longer if they were to suffer the loss of their regular income. Perhaps more worrying is that more than a quarter of customers in the same group have no savings, and more than 80% have little to no savings accessible within seven days, in the case of an emergency.
Cashing in retirement savings or long-term investment policies is a common coping mechanism used by consumers as the demands on their finances increase during turbulent times. A short-term solution? Yes. A sustainable one? No. The consequences of withdrawing from your retirement savings pot are numerous and dire. Prioritising emergency savings is vital for financial wellness and peace of mind for when (not if) that rainy day arrives.
A reality check
Take a look at the life you currently live: the car you drive, the house you stay in, your hobbies, and even the items you add to your trolley at your preferred supermarket. If you were retrenched tomorrow, or for any other reason lost your regular income that paid for these things, what would you do? Would you have to default on your rent or home loan? Would you have to borrow from family (who may be struggling themselves) to honour your car instalments?
The odds say you would, which is why you need to take emergency savings seriously as part of your long-term financial plan.
“Emergency savings are like an umbrella – unforeseen circumstances, much like the rain, often come unannounced. By being prepared, you can survive the rain without incurring any financial damage to both your current and future financial stability,” says Karabo Ramookho, strategic retail marketing manager at Old Mutual.
If you are already paying off a car and home, the last thing your finances need is the liability of an additional lender just to keep up with the agreements you have with the other two.
“Emergency savings also prevent you from cashing in long-term goal-based investment products when you are desperate to access cash to pay for unforeseen immediate expenses, such as paying for repairs to your home or car, medical expenses or even living costs, as a result of loss of employment,” says Ramookho.
Don’t throw away years of growth
Your retirement savings is probably your most long-term investment. Time works in your favour to help your money grow without you even having to think about it, thanks to the power of compound interest. Invest, earn interest and, if you stay invested, you earn interest not only on the amount you first put in, but on all the growth it has enjoyed to date.
“As the cycle continues, you keep earning interest on a larger cumulative amount, year after year,” says Ramookho. “If you take your retirement savings as a cash payout and start from scratch when you join another company (if you lost your job), you’ll probably never catch up on the compound interest you would have earned had you transferred the full amount into a preservation fund.”
Beware the tax implications
You have a R500 000 tax-free lifetime aggregated limit on withdrawals from your retirement fund if you are retrenched and when you retire. If you have been retrenched, think about what using up this tax-free amount means for your 65-year-old self when you retire. Using it now means taxing your future self heavily when all you want to do is access the pot of funds you’ve built up over the decades to enjoy during your golden years. Do you want to retire and kick yourself as you reflect on your money choices with regret?
Ready, set … save!
Every household is different, but a good guide to use for determining how much you need to have in an emergency fund to weather a rainy day is three to six months’ worth of household income, says Ramookho. “This means that, should there be a complete loss of income, the household will be able to cover living expenses for a period of time,” she explains.
When it comes to the savings vehicles ideal for an emergency pot, look at accessible options such as low-risk unit trust funds or a flexible bank savings plan.
PERSONAL FINANCE