Emergency Funds are there for both unexpected and expected expenses due in the next 12 months. A great way to start an emergency fund is with the use of money market unit trusts.
Why Unit Trusts?
a unit trust or collective investment scheme allows you to have exposure to a wide range of investments. In the case of a money market unit trust, you will have exposure to different issuers (government, banks & corporates) and the money will not be lent out for longer than 90 days on average.
How much do I need?
You can start with R500 per month or a lump sum of R20 000. Once the account is open you can always add money to this investment with the minimum additional amount being R500.
Can I access my Investment?
You will have complete access to your funds without paying any penalties and the money should reflect within 4–5 working days in your bank account. Any amount that’s invested via a debit order or collection will have to be invested for at least 30 days.
Why only 12 months?
Because money market returns does not always beat inflation, after taxes and expenses. The returns are in the form of interest where you will pay tax on amounts earned above R23 800 per year if you are under the age of 65 (2018/2019 tax year) or R34 500 of you are over the age of 65 (2018/2019 tax year).
As soon as you have enough money covering expenses due in the next 12 months, you can consider other investment vehicles with slightly more exposure to growth assets (i.e. shares & property).
Where can I invest in a money market fund?
Most asset managers (Coronation, Foord, Allan Gray, Nedgroup Investments, Investec, etc) have these types of money market funds. You can consider investing directly into these funds or via an investment platform.
this is not to be seen as financial advice. please consult an independent financial advisor.