Life often throws unexpected challenges and unforeseen financial bumps our way. This can disrupt our financial stability. However, understanding financial matters can be a key decider between whether you have financial cushion or you sell your properties or you go begging.
In this guide, we’ll explore the importance of having an emergency fund, how much to save, and when to use it when the unexpected happens.
According to the International Labour Organization, the unemployment rate in Africa increased from 7.3% in 2019 to 8.0% in 2020. Additionally, a recent survey by Bankrate in the United States found that one in four Americans do not have up to a $1,000 emergency fund.
Key Takeaways
- Emergency funds acts as a cushion when facing job loss, car troubles, home repairs, or medical emergencies.
- The recommended target for an emergency fund is 3 to 6 months of living expenses.
- Replenishing the fund after using it for unforeseen expenses is essential for financial stability.
- Build your emergency funds by saving, budgeting, prioritizing, setting up automatic transfers, and keeping it in a high-interest savings account.
- Strike a balance between accessibility and the temptation to spend impulsively.
What Is an Emergency Fund?
An emergency fund, sometimes referred to as a rainy day fund or emergency savings is like a financial safety net. It’s the money you set aside to cover unexpected emergencies or unplanned financial expenses. Well, think of it as your financial cushion for when life takes an unexpected twist.
Why You Need An Emergency Fund
- Your emergency fund acts as a financial shock absorber, protecting you when you face:
- Job Loss
- Car Troubles (Auto Theft or Breakdown)
- Sudden Home Repairs
- Medical Emergencies
How Much Is Enough For An Emergency Fund
Aim to save enough to cover between 3 to 6 months of your living expenses. If your monthly living expenses amount to 150,000 naira, then you should maintain nothing less than 450,000 naira in your emergency funding account. However, the more you save, the better it is for you.
It’s important to note that you should reserve this money for genuine financial crises, not for impulse buys like new shoes or a fancy dress for your best friend’s wedding.
Getting Started with Your Emergency Fund
If you’re considering building one, here’s a step-by-step plan:
Step 1: Calculate the specific amount you need to have in your rainy day fund.
Step 2: Open a separate savings account, ideally one with a high-interest rate.
Step 3: Set a savings goal for daily, weekly, or monthly contributions.
Step 4: Start small if necessary, but keep the contributions consistent.
Step 5: Periodically review your how much you have, especially when you experience significant life changes like a raise, bonus, or a new addition to your family.
Only use your financial cushion for a genuine unforeseen expense, be sure to replenish it as soon as you regain financial stability.
How To Build Your Emergency Fund
- Save windfalls or bonuses directly in your emergency backup.
- Create a budget and cut down on unnecessary expenses to boost your savings.
- Make having an emergency savings a financial priority.
- Set up automatic transfers to your fund until your goal is reached.
- Keep savings net funds in a high-interest savings account for maximum growth.
Bottom Line
Lastly, remember, your rainy day fund savings should reside in a secure savings account, making it easy to access when needed, but not so accessible that you’ll be tempted to spend it on a whim.”