FAQ

Here are a few common questions about how to optimise your emergency savings.

Should I use my bond?

Yes, if you are sure you can access the extra funds that you deposit into the account.

If you have a mortgage on a property and the bank that gave you the loan offers a facility to “overpay” the minimum payment and still have access to that extra money (often called an “access bond”), that is the best way to build up your emergency savings.

You are getting two benefits by doing this:

1. The reduced interest you pay on the loan is effectively a return on the extra money you are “saving” in your mortgage. Even if you have been given a very good low interest rate it will almost certainly be higher than the interest you’ll get paid from any savings account.
2. The gains you make through saving this way are not taxable since they’re actually just reductions in the interest you pay on the loan. If you were saving into a normal savings account you’d be liable to pay income tax on the interest you earn.

Make sure that you monitor how the bank handles your repayments going forward.

By adding extra funds to your mortgage you will be reducing the minimum amount you need to pay each month. If the bank adjusts your debit order amount down to match the new minimum amount make sure that you still have access to the extra funds you added and that these don’t start to decrease over time.

Should I use my bank account?

Probably not, but that depends on your bank.

While some banks offer a decent interest rate on savings accounts, you should find a way to invest your emergency savings so that they are getting the best return while still being liquid.

Shop around or use a tool like Rate Compare to help you find the best account for you.

Should I use my TFSA?

Definitely definitely not!

Tax Free Savings Accounts (TFSA) are a special savings account where the benefit you get comes from not paying tax on the gains you make. As we explain in our TFSA section, you should be putting as much money into your TFSA as you are allowed (if you can afford to) and you should leave it there as long as possible.

You can put up to R 36,000 into a TFSA each year and a maximum of R 500,000 during your lifetime. But the most important thing to remember is that SARS only looks at money you put in, not money you take out. You can't "replace" money you take out of a TFSA you can only add more, and if you're at your limit then you're out of luck.

Imagine you had saved R 200,000 in a TFSA over the last 10 years (well done, by the way!) and then you take R 150,000 out in an emergency. You can still only invest another R 300,000 into that TFSA for the rest of your life so you've reduced the potential of this investment vehicle by about a third meaning that if you do have money to save in future you'll have to put it in another investment and pay tax on the returns.

Taking money out of your TFSA for an emergency is handicapping one of your most valuable investment options. If you are currently putting money into a TFSA, that’s great, but make sure you top up your emergency savings first so you don’t risk ruining the long term value of your TFSA in an emergency.

Should I use my investments?

No. The long term value of your investments come from the incredible power of compounding over time. The fastest way to destroy that value is to interrupt the process by making withdrawals.

If you have to sell off some investments to deal with an emergency cash crunch that really is the worst case scenario for your investments.

When you make investments to grow your wealth you should be doing so with a long term view. That allows you to ride out bad markets and benefit from the power of compounding growth.

If you have to cash out your investments for a few months and then slowly start to build them up again after you’ve recovered, the long term impact is huge.

You never know when that cash requirement is going to crop up and it might just be when the market is down and so is the value of your investments. 

This chart shows the performance of the top 40 shares on the JSE over the last 5 years. Imagine you lost your job during the COVID pandemic and needed some extra cash to cover a few months of expenses. Now imagine the only savings you had were the investments you'd made into local equities.

That sharp dip in early 2020 coincided with the COVID lockdowns and if you had nothing to cover your loss of income except your shares you'd have been forced to sell them at a huge loss. Instead if you had some emergency savings you could have left your shares alone and they would have quickly recovered (the JSE top 40 had almost doubled in value a year after that big drop in March 2020).

You are also going to be subject to tax on your investments when you cash them out. If you’re cashing out a retirement annuity or pension that could be a lot of tax (taxed at your current income tax rate).

For example, if you need a quick cash injection and cash out part of your retirement annuity to cover it, you might lose up to half of the value that you cash out through fees and tax.

Should I use debt?

Debt can be expensive. If you’re taking out a loan to deal with an emergency (as opposed to borrowing money to buy an asset like a house) the interest rates will be very high.

When you take out a loan to buy an asset the lender will use that asset as security against the loan (a secured loan). If you can’t pay the loan back, the lender has the right to sell the asset, and take whatever you still owe them from the proceeds of the sale. In return for this security you should get a good interest rate.

When you borrow money with no security, such as through a personal loan, the lender will charge you more interest to cover the extra risk.

If you’re dealing with an emergency, the last thing you want to do is find yourself paying off high interest debt. This often leads to a debt spiral where the income you are able to generate is only servicing your debt and you are never able to start saving or investing again.