The importance of emergency savings – On the Money with Jarryd Neves

Jarryd Neves
On the Money. Budding stock market investor Jarryd Neves, of BizNews, sends out an invitation to everyone who wants to ask questions about share investing – but is too embarrassed to ask. Write to [email protected] And tune in for his regular Monday column: On the Money

I have the absolute worst luck with phones. If they’re not being stolen or falling in the pool, they’re flying off the roof of my car as I drive off. So when I put my spare phone on charge last night, I wasn’t the least bit surprised to find the elderly battery had died – while on charge.

No matter, it was time to fix my other phone and its very cracked screen. Nearing the end of the month, the last thing anyone wants to do is fork over R2,000 to repair a phone. I certainly didn’t want to. But thankfully, I had a bit of cash stashed away for a situation just like this.

I definitely didn’t want to dip into my monthly budget. The emergency fund certainly pulled through. So why is having access to rainy day savings so important? Firstly, emergency savings can prevent you from getting into debt (or incurring even more debt). When you’re trying to pay off loans or credit card bills, an unexpected expense is the last thing you need.

It can also keep you on track with financial goals that you’re trying to achieve. A bump in the road can have you dipping into funds intended for that dream home or holiday. Unexpected expenses will only push those dreams further away.

It’s not just unexpected expenses, either. Courtesy of Covid-19 and a weakening economy, the job market is now more turbulent than ever. Emergency savings will cover you for a couple of weeks while you look for work. While it is easier said than done, slowly building up a fund for a disaster such as this could potentially limit any debt you may have to go into.

Many experts and financial planners recommend that you have at least three months salary saved in case this happens. As the Covid-19 pandemic has shown us, that may not even be enough.

For many South Africans, just surviving through the month is difficult enough. But if you can stash a little bit away each month, you will thank yourself when the proverbial hits the fan.

Last week, I asked you to send me your finance and investment queries. Here, Johan Steyn, CFA* of Stellenbosch University, and Aidan Freswick* of Brenthurst Wealth Management, share their expert advice by providing answers to your questions.

Alan asked,

I have credit card debt but I really want to start investing. Should I pay the debt off first? Or should I start investing now?

Johan answers,

Although it is commendable that you want to start investing, it is very important to pay off any expensive debt. Credit card debt is one of the most expensive forms of debt. They typically charge around 20% on capital outstanding. This places quite a high hurdle for your investments, as you will need to earn at least 20% on your investment account before you ‘break-even’. Arguably, having credit card debt also affects your risk tolerance in your investment portfolio.

This is because any losses in your investment account would hamper your ability to service and pay-off the credit card debt. So I would absolutely recommend paying off the debt first. Having said that, I do believe having a credit card facility can play a role in managing your personal finances. However, it is necessary to have good self-control and be very diligent in paying it off monthly. That way you can take advantage of the interest free period which credit cards typically have.

S. Muzanya asked,

Are we heading for a stock market crash? There is talk of a bubble brewing. As an investor, how do you protect yourself from severe losses?

Aidan answers,

Several analysts and market observers have cautioned that the recent rallies on stock markets, the local market included, will not last and that investors must be prepared for a market pull-back.  However, if you are a long term investor, short term market movements should not concern you too much. The absolute worst thing to do is to attempt ‘timing’ the market.

The sell high, buy low approach has burnt many investors who made a decision out of panic or greed. Over the past century markets have been affected by events like World Wars, the depression of the 1930’s, the OPEC oil embargo in the 1970’s and the big financial meltdown of 2008 but have always recovered. Sometimes the recovery took several years, other times markets bounced back quickly.

See this chart of a 100 years of the Dow Jones Index. If you are a buyer of individual shares make sure you invest in quality companies and that you understand what those companies do and what the prevailing realities are in the industry that they operate in. If you have a diversified portfolio with exposure to different asset classes and you focus on your long term strategy, do not be overly concerned about short term market movements.

  • Johan Steyn, CFA is a lecturer in investment management, from the department of business management at Stellenbosch University. He holds a Masters in investment management and has a background in fund management. Aidan Freswick is a wealth advisor at Brenthurst Wealth Management.

Have a question about share investing? Write to me at [email protected].

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