There’s nothing quite like a crisis to focus the mind and force much-needed change. This truism will be familiar for the many South Africans who suffered loss and/or health challenges related to the infection of Covid-19. For some, this would have been exacerbated by retrenchment or affected income due to the lockdown and restrictions on movement. At a time they most needed it, many households found themselves out of pocket as they had no funds to see them through a crisis.
“Emergency funding is as critical to a financial plan as investing and planning for future financial goals, whether that’s your children’s university education, a new house or retirement,” says Gontse Tsatsi, Head of Retail Distribution at Old Mutual Investment Group.
“The key to reaching your long-term financial goals is to ensure that the occasional crisis does not derail your plans. If someone doesn’t have this emergency fund to draw on, they would either take on debt or dip into their retirement savings upon retrenchment, both of which are detrimental to one’s long-term finances.”
With the opening of the economy, Tsatsi says it is now possible for some people, to start getting back on track and slowly begin building emergency reserves. “In an ideal world, a rainy-day fund should be sufficient to cover your expenses for at least three months, but preferably six.”
“However, the opportunity cost – which describes the potential benefits the investor misses out by saving and not investing – begs the question whether it’s possible to save for an emergency while growing your wealth,” he says.
Tsatsi explains that the best type of vehicle for an emergency fund needs to be liquid. For example, it needs to be in the form of cash or an asset that can be readily converted to cash. “A notice savings account, for instance, might be an easy savings instrument with decent returns, however, over the long term you pay the price for that security because it is inflexible — you can’t pull the money if you need it within the lock in period. And as we know, emergencies don’t always announce themselves ahead of the time so that you can plan how to deal with them.”
He says it is for this reason that low- to moderate risk unit trust options are a favoured instrument for emergency fund savings. “A lower risk, short- to medium term unit trust offers investors access to a wide variety of funds that aim for stability and grow in value just enough to keep up with inflation.”
“Fund managers blend cash instruments, government bonds, corporate bonds and even sukuks (also known as Islamic notes) to beat the returns offered by conventional savings accounts. The watchword for such funds, therefore, is maintaining above-inflation growth without undue exposure to risk offering stability but also decent returns to outpace enemy number 1 — namely inflation,” says Tsatsi.
In addition, he explains several other benefits of a unit trust that will give investors peace of mind. “Money invested in a unit trust is available immediately and with no strings or penalties attached. Also, investors can stop contributing at any time without losing the money already invested in the unit trust.
In addition, these flexible investment vehicles are ringfenced, which means that regardless of the financial health of the service provider, the savings invested in a unit trust never forms part of the balance sheet of the organisation. This means that if the company goes insolvent (bankrupt), this money is secure,” he says.
Tsatsi says it can only be hoped that Covid-19 was a timely wake-up call for South Africans to be more diligent in putting aside money for a rainy day.
“The reason for doing this is not only to tide you over in a time of crisis, but more so to make sure that your long-term financial plans are not jeopardised. Savers should, therefore, place equal emphasis on their short-term savings as they do on saving for retirement because they are so closely interlinked,” he concludes.
PERSONAL FINANCE