An emergency fund is an essential safeguard against a loss of income or unexpected expenses (in our earlier article on Why You Need an Emergency Fund, we listed several expenses that can catch you off guard). But an emergency fund will do more than simply prepare you for the unpredictable. In this article, we explore several other ways that an emergency fund can benefit you.
The first major benefits of having an emergency fund is that it can grow valuable interest when the money is just left to do its thing. The more you have in your account, the more interest you’ll earn, but the type of account (and interest rate) will also determine how much interest you earn.
32-day accounts are known for their reasonably high-interest rates, but they don’t allow you to access your funds quickly without incurring a penalty. Shop around for a savings account that allows you to access the funds quickly but still yields a relatively high interest rate. The Old Mutual Money Account, which earned an average rate of return of 7% in 2017 and 2018, is a great option in this regard.
Big, unexpected expenses can catch you off guard, and more often than not, they’re urgent. A vet bill, vehicle repair, or broken roof are not costs any of us typically budget for. If you don’t have an emergency fund when fate comes knocking, you’ll have to resort to credit, which only increases the cost of such expenses further down the line. One of the biggest advantages of an emergency fund is that it allows you to cover these expenses without having to take a loan.
People tend to put a lot of focus on their credit scores when they start looking to buy a house. While your credit score is one of the the biggest factors in getting a home loan approved, it’s important to understand that when you apply for a home loan, a lender will usually take a holistic look at your finances before deciding whether to approve a loan.
Liquid assets, such as savings, can help reassure them that you’ll still be able to make repayments even if you were to suffer a financial setback (such as losing your job). This could lower your risk status as well as the interest rate on that loan. A history of savings might also be seen as a sign of good financial habits.
It’s said that money can’t buy you happiness, but that depends on your definition of happiness. If happiness means peace of mind, money certainly is a factor. Having a solid emergency fund can give you peace of mind by reassuring you that you can manage unforeseen expenses. By minimising financial stress, you can even improve other areas of your life; the real value of an emergency fund extends far beyond the rands in the account.
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