Can you survive a R10,000 financial emergency?

Research published by Old Mutual, shows how many South Africans are adequately prepared for a financial crisis.

In order to get a fix on the financial “robustness” of South Africa working metro households and to better understand behaviour in the face of a financial emergency, the financial service company conducted a poll in which it asked respondents how they would handle an unforeseen expense of R1,000, then R5,000, rising up to R100,000.

The survey revealed that at total market level, all bar 1% of working households can handle an unforeseen expense of R1,000. Just over half (54%) would access available savings, 7% would use a credit card and the remainder would borrow the money, most likely from a friend (28%) or stokvel (7%).

Four out of 10 respondents (40%) said that they would not be able to pay a R10,000 emergency, up from 35% in 2016, while at R100,000 the vast majority (85%) would not be able to handle this, Old Mutual found.

Similarly, in its Benefits Barometer 2016, Alexander Forbes posed the following question: If a financial crisis is one of the contributors to poor preservation, why aren’t we doing more to make saving for an emergency a focus and even an automatic process for our employees?

The key issue addressed through an emergency savings habit is that if a financial crisis occurs, the employee can deal with it without destabilising any long-term savings strategies.

It is reported that in 2016 only 10% of people who earned between R20,000 and R40,000 a month would be able to fund an unexpected expense of R10,000 from their savings, which implies that their short-term savings were insufficient or non-existent.

For those earning less than R20,000 a month, the situation was worse, Alexander Forbes said.

In 2017, the figure went up to 15% for those in the higher earnings bracket, so the situation appears to have improved a little but still requires intervention, it said.

Alexander Forbes points to an emergency savings regime as a potential solution. The idea is to take a portion of a member’s pension fund contribution, and place it into an emergency savings vehicle.

“The idea behind such a solution is to leverage the power of compulsory long-term savings (retirement saving) to help employees meet short- or medium-term needs such as emergencies or other savings goals. This leaves employees with a sense of immediate value, as they can experience the benefits of their savings throughout their lives,” Alexander Forbes said.

As an example, it said that for employees who were contributing 14% of their salaries to an employer-sponsored fund, could reduce the  contributions to 10%, and allocating 4% towards the emergency vehicle.

Employers and employees need to appreciate that this type of solution is sustainable only if savings are not withdrawn frequently. If the emergency savings plan is used as a bank account and savings are withdrawn every other month, then it will not be viable, Alexander Forbes said.

Read: One graph that shows South Africa’s sorry state of savings

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Can you survive a R10,000 financial emergency?