In life you should expect the unexpected, and this is why you need an emergency fund. The idea behind an emergency fund is to save part of your salary or income for the sake of “just in case”. In case you lose your job, in case you need to do work at home e.g A/C break downs or even your car . It’s unavoidable and that’s why you need an emergency fund.
Most financial expert recommends around 6 months of living expenses but the amount will definitely different for everyone. However, you need to consider your specific situation such as number of children, family support, available insurance covers, and total income when determining the amount you need to set aside. For example some companies do not provide complete health insurance coverage for the employee’s entire family. Your emergency fund should consider the dependents who are not covered under the medical insurance.
Make a list of all your regular monthly expenses such as housing , food, utilities, debt repayments, transportation costs, insurance and any other “must-pay” bills. Then multiple the total of these expenses by 6 ( six months). For example, if you need to cover D5,000 in monthly expenses for 6 months, you’ll need to set aside D30,000 in your emergency fund.
Why 6 months? In case you loses your job and you still have bills to pay and it may take few months to find another suitable employment. It is best to plan for a worst-case scenario so that the smaller emergencies like A/C repairs can be covered easily.
You do not need to save the D30,000 living cost in one month. First, assess your financial condition and decide on how much you can save. You can start with a small amount and accumulate it over time. You can even make weekly or monthly deposit into the fund. If the funds are coming from your current / monthly salary account, it is wise to do a standing order ( an automatic saving ) from the salary account to emergency savings account. Ask your bankers, they can do it for you.
Where to Keep Your Emergency Fund
The answer is simple: Keep it in an account where you can get it quickly, when you need it and without losing value.
Do not put your emergency funds into stock or mutual funds because the short-term volatile market could cause you to lose money.
You can start with a savings account because it is simple to operate and generally does not cost anything. As the funds grow, you can consider other liquid account such as fixed deposit (certificate of deposit) or money market funds.
As the name implies emergency fund should only be used for real emergencies such as a job loss. If anytime you used part of your emergency fund, you should quickly try to bringing it back up to the full amount.
Establishing an emergency fund should be a priority in your personal finance because your failure to plan cannot be someone’s emergency tomorrow.