Start saving now for those rainy days

DOWNSIZING, rightsizing, forced retirement, lay-offs, firings, outsourcing and being made redundant could spell financial catastrophe.

DOWNSIZING, rightsizing, forced retirement, lay-offs, firings, outsourcing and being made redundant could spell financial catastrophe.

Losing your job could put a big dent in your financial goals and set you back several years. You may need to live on your savings or liquidate some of your investments.

If you have no savings or investments you might have to rely on credit, which could rack up significant debt. Then, when you find a new job, your expenses might have increased because of the credit payments.

And the job you eventually find might not pay as much as the one you lost. So you are now forced to live on less while your expenses have either continued at the same level or even gone up.

Studies show that the average worker will have six career changes in a lifetime. Not just job changes, but career changes.

So how can you prepare for your financial "downtime"?

An emergency fund. This is really just savings, but it is not savings for a particular item or even an investment for your future or retirement. It is your "rainy-day" fund. But unlike insurance, where once you pay your premium, the money is out of your hands, your emergency fund is yours to keep.

The easiest way to figure out how large your emergency fund should be is to take your current income and multiply it by the number of months you could be out of work. If you make R10000 a month and you want to be prepared for six months, you will need R60000.

But obviously saving R60000 will take some time. How quickly you want to build your emergency fund depends on how concerned you might be about your current and future employment prospects.

Saving this amount could take you years, but the more you save the sooner you will have the money.

Consider inflation. If you own your home you are at an advantage , but if you are renting your rent will escalate.

The cost of food, utilities and taxes also rise over the years. It might take you years to save your R60000, but even then, with inflation, that amount will buy you much less after all that time.

A good rule of thumb for saving is to try to save enough each year to supply you with one month's income. This means you are saving one-twelfth or 8,3percent of your monthly income. This will allow you to build your emergency fund by one month every year. After only six years, you will have a six-month supply of emergency cash. Then you can continue to extend your "coverage-period" or you can divert the monthly payment into other savings or investments.

Most people find that "charging" themselves for savings and investments is a good way to put savings on auto-pilot. If an amount is taken automatically from your bank account each month, it is easier to handle than if you wait until the end of the month and try to save from what you have left over.

The best place to keep your emergency fund is where you do not have easy access to it .

Savings accounts are fine but usually pay very little interest. If you opt for a savings account, open one at a bank that you don't regularly use. Or look for a money market account that pays a reasonable interest rate and on which you do not have to pay tax.

Adjust your budget to accommodate having less money each month and forget about it.

Boost your emergency fund by putting your bonus, birthday gifts, inheritances, insurance settlements and tax refunds into it. - Simple