Be financially prepared to lose your job – here’s how

By Isabelle Coetzee

During uncertain times, it’s natural to be concerned about the security of your job. Regardless of your performance at work, you may be out of work if your company is no longer profitable.

But what would that mean for your personal finances, and how would you survive if you suddenly lost your income? We found out why an emergency fund is essential for this situation.

Tip: Take out credit life insurance today to protect you from further debt if you lose your income.

What is an emergency fund?

According to Nkazi Sokhulu, CEO and co-founder of Yalu Financial Services, an emergency fund is money which you’ve saved in case of an unplanned event, such as losing a job or a major repair of a vehicle.

“Personal finance experts usually advise that you have at least between three to six months’ worth of your salary in this fund. In the unfortunate event that you lose your job, you will at least have a safety net to fall back on, which will allow you to cover your expenses for those months while you look for another job,” says Sokhulu.

He explains that the benefit of having such a fund is that you won’t have to withdraw from your long-term investments, which may yield penalties, or borrow from the bank and pay unwanted interest. He believes that in the long run, it’s probably cheaper to have an emergency account than to borrow from the bank when an unplanned event happens.

According to Dez Tswaile, financial planner at Emphasis Wealth Advisory, an emergency fund is set up to cover big, unexpected costs, such as:

  • Medical emergencies – think burst appendix when you don’t have a medical aid
  • Home disasters – bye-bye bathroom faucet or broken water pipe
  • Car repairs – things not covered in your maintenance plan
  • Sudden job loss – whatever the cause

“The cash in this fund would ideally cover these associated costs and prevent you from incurring debt by swiping a credit card or taking out a personal loan at your time of need,” says Tswaile.

How to create your own emergency fund

In this economy, Sokhulu point out that, if at all possible, it’s advisable to have at least a year’s salary saved up, surpassing the three to six months minimum, since you never know long it could take you to find another job.

“You can do this by saving money every month, even if it’s a small amount – a little goes a long way if you’re consistent and disciplined. A great way of doing this is by automating your savings by creating a debit order that will be added to your account on a monthly basis,” says Sokhulu.

He adds that you can also save any additional earnings or annual increases and bonuses into the emergency fund until you have a year’s worth of your salary available.

“Essentially, an emergency fund is a type of savings account created for the sole purpose of using it when an unforeseen event occurs. However, unlike most savings and investments, it’s imperative that you have quick access to it when an emergency happens,” says Sokhulu.

“Quick access will eliminate the need to use your credit card or get a personal loan, so you can avoid the interest fees payable. However, you also need to be disciplined enough not to dip into this saving whenever you feel that your budget is tight. Most experts recommend you store your emergency savings in a separate, de-linked bank account to avoid this,” he explains.

READ MORE: How to build an emergency fund

Tswaile recommends setting both a savings target and a savings period, which will then help you determine how much you should aim to put away each month. Alternatively, he says you can calculate how long it will take you to get to your target with your known budget.

“There are a number of free calculators online that you can use to help you with these calculations. Alternatively, it’s best to get help from a financial adviser,” says Tswaile.

Have a look at our budget calculator to help you set up a savings plan for your emergency fund.

Can credit life cover help?

According to Sokhulu, credit life insurance is a very good tool to provide relief for total loss of income. He explains that this insurance pays your debt on your covered credit facilities when you’re no longer able to pay due to, among other things, retrenchment.

“Credit providers usually insist that you have this cover for the duration of your loan or other credit agreements, particularly for personal and student loans and in some instances for credit cards, home loans, and vehicle loans,” says Sokhulu.

“Typically, credit life insurance will pay your debt instalments for up to 12 months if you get retrenched, giving you good financial relief so you can focus on getting another job,” he adds.

Did you know you could save on credit life cover? Get a quote by filling in the form on this page.

Sokhulu says that if you don’t have credit life insurance, it’s advisable to reach out to your bank and other credit providers to work out a reduced payment plan that you can afford until you’re able to get back to the original instalments.

What about your other costs?

According to Tswaile, you can only use what’s yours.

“If you don’t have any money saved up especially for this purpose, then you’ll be forced to either change the objectives of your other savings or investments,” says Tswaile.

“And if you don’t have any of those, or you don’t want to change the objectives, then loans are your only way out – unless you can find a side hustle which can quickly replace your lost income,” he explains.

We allow readers to compare savings accounts from the top South African banks. Click here for more.

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