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The Importance Of Saving For A Rainy Day

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If the past year has taught us anything, it is the importance of financially preparing for uncertain events. Whether it is uninsured medical expenses, unplanned car or home repairs, or an unexpected loss of income, budgeting for a rainy day is crucial.

Important factors to consider when setting up your emergency fund:

  1. The savings should be easily accessible.
  2. Ideally, the returns should at least keep pace with inflation.
  3. Having a budget and sticking to it will help you to set aside enough savings for a rainy day.

Saving and Budgets 101

The rule of thumb for saving is to allocate at least 15% of your pre-tax income to retirement savings. After you have done this, you can then consider the following spending guidelines for your after-tax income:

  • 60% for necessities (housing, food and utilities)
  • 30% for discretionary items (entertainment and luxuries)
  • 10% into discretionary savings (education, emergency fund, holidays etc.)

Everyone has unique financial needs, so you need to determine the formula that is right for you – a financial adviser can help!

A few practical tips to help you save more

Delaying saving until you have ‘enough’ money is sure to end in failure to meet your savings goals. You are far more likely to succeed if you prioritise investment and commit your money to your goals before you spend it on the next ‘online shopping special offer’ that comes your way.

You need to start by making incremental changes to your lifestyle and to continue increasing your commitment until you attain your optimal savings level. Over time, such small adjustments are unlikely to be noticed, but the ‘sacrifices’ you are making gradually and consistently add up. The key is to start as soon as possible, and to continue to build on that once you have a firm foundation in place. Here are few more guidelines to get you started:

  • Adjust the amounts you save annually in line with inflation increases.
  • Keep a record of all the money you spend and compare it to your budget each month. This will help to point out where you need to make some adjustments to your spending.
  • Don’t try and keep up with the Joneses.
  • Always preserve your retirement savings when you change employment.

Selecting underlying funds

When choosing a savings product to invest in, it is important to consider the underlying funds within the product. Fund selection will depend on your goals, approach to risk and time horizon for investing. When saving for a rainy-day fund, capital preservation should be a focus. Investments that provide some exposure to growth assets, while protecting downside fluctuation, are therefore likely to be most suitable.

Make sure that you consult with your financial adviser to determine the level of risk that is appropriate for you before deciding which products are suitable. Determining your risk profile will also be vital in determining what potential events might occur in the future and which investments can protect you from the financial consequences of such events.

Jan van der Merwe, Head of Actuarial and Product at PSG Wealth

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