At 23, what level of emergency funding should I have?

As you have highlighted, there are many differing opinions regarding what level of emergency funding should be held. To answer your question more succinctly, let’s start by understanding what an emergency fund is. As a cash cushion, an emergency fund is an easily accessible pool of money that can be used to help cover unforeseeable, high-cost expenses – without which, you would be forced to incur debt.

Ideally, your emergency fund should be clearly earmarked so that the money does not serve dual or even multiple functions in your portfolio. That said, keep in mind that, if saved in the correct vehicle, your emergency fund can do more than just protect against unpredictable expenses – it can also earn you interest and give you financial peace of mind. Building up an emergency fund will help increase your liquid assets which will assist you in the future should you need to apply for financing or credit.

When determining the appropriate level of emergency funding, you need to give careful consideration to your unique set of circumstances.

You have mentioned that you are single and do not have any dependants, so an important factor to take into consideration is that you are the sole breadwinner and you do not have a spouse’s income to fall back on if you should lose your job. If you have a single source of income, this is another factor that can place you at higher risk as you are solely dependent on that to cover your living expenses and save for the future.

The nature of your work and the industry in which you operate are other factors for consideration, as are your qualifications, skills and unique set of expertise. If you’re highly skilled in a high growth industry, the likelihood of job loss will be less than if you’re operating in a low growth or stagnant industry. If you’re a contract or freelance worker, you may want to build additional emergency reserves to protect against loss of contract work or irregular income.

Your health status, level of medical aid cover, and whether you have a gap cover benefit in place are further considerations, as lack of comprehensive healthcare cover may necessitate a higher level of emergency cash.

If you are a property owner, keep in mind that there are several high-cost, unforeseeable expenses that you may be faced with such as burst geysers, broken household appliances, flooding, or fire damage – and while you may have short-term insurance in place, remember that you may be required to pay upfront and claim later, meaning you will need access to cash.

Pets can also be a source of unforeseeable costs, so consider how you will pay for vet bills and whether or not you have pet insurance in place.

Keep in mind that your emergency fund is not there only to cover your living expenses in the event of job loss. It can also be used to cover high-cost expenses such as medical costs not covered by your medical aid and/or gap cover, including co-payments, over-the-counter medication, medical devices and appliances, and alternative therapies. Other high-cost items include unexpected tax bills, expensive vehicle repairs, or emergency travel. 

The best place to house your emergency funding is in a vehicle that allows you immediate access to your cash, earns interest, and which you ideally cannot access via your debit card. While fixed deposits and notice accounts can earn you interest, there may be some delay in accessing money held in these accounts, and you may be liable for penalties if you access the funds before a certain amount of time has passed.

On the other hand, tax-free savings accounts (TFSAs) are more appropriate for long-term savings as any withdrawals made from a TFSA will affect your lifetime contribution limit. Similarly, retirement annuities are specifically suited for long-term savings and the money held in these investments can only be accessed after age 55. If you’re invested in a discretionary unit trust portfolio for a long-term goal, accessing these funds for emergency purposes could result in you having to withdraw when markets are down, thereby effectively losing money.

If you have an access bond facility, this is a great place to save your emergency money. Although you may not physically earn interest, these additional contributions are saving you interest on your bond and provide easy access to cash. Similarly, a designated savings account linked to your primary account – but which can’t be accessed using your debit card – is an excellent place to store your cash.

Remember, the value of an emergency fund is the unnecessary extra expense of expensive short-term debt rather than the interest you could earn on these saved funds.

We trust that this helps you make an informed decision regarding your emergency funding.