What is an emergency fund and do you need one?
Unexpected events happen, and proper preparedness helps us deal with them faster. The oil price plunge in 2014–2016 led to thousands of job losses in the hydrocarbon industry, leaving some without income for months. But with an emergency fund, they could have navigated those tough times with less stress.
In financial terms, an emergency fund helps us reduce financial distress while we navigate out of challenging situations. Sometimes, it may be mistaken for conventional savings, but rather it’s a fund with a clear plan for its use.
Do you really need an emergency fund?
Due to the realities of different economic groups, not everyone will subscribe to the concept of having a fund for emergencies.
That being said, if you have a steady stream of income, a fund for emergencies doesn’t hurt to insulate yourself when things go sour. It’s like having a fire extinguisher — no one wants a fire, but it’s crucial to have a means of dealing with it immediately and minimizing the damage.
What constitutes an emergency?
What constitutes an emergency for you? Is it job loss, property damage, or health issues?
For most, the ability to earn can be significantly impaired during an emergency. If you have health insurance, a robust fund solely for health purposes might not be necessary.
How much should be in my emergency fund?
With answers to the above questions, it becomes easy to have a mental image of your amount to save in case of emergencies. An example could be having up to six months of living costs sorted or an extra 400,000 for medical costs.
What is my average monthly spend?
Where your income source is cut off, sustaining daily and monthly expenses can become difficult after extended periods. However, knowing your average monthly expenses can help you determine your fund target.
For example, saving six months’ running expenses could be a reasonable target.
Here’s an assignment for you (if you’re yet to do this): document how much you spend for the next three months and take an average of it.
Doing this is not just great for planning emergencies but also helps you track spending habits.
Where do I keep my emergency fund?
The general rule of thumb is to have your funds for emergencies easily accessible, such as in a savings account like the one offered by Mkobo bank. With the Mkobo bank app, you can easily open an account for your emergency fund in a few minutes. Saving to your Mkobo bank account and withdrawals takes a few button taps.
How to build an emergency fund
In most cases, building an emergency fund will take some time. You gradually save your way up to the target amount. Here are some tips to help you build an emergency fund:
1. Save from every paycheck
By now you should have a target for your fund. What’s left is how you will meet this target over ‘x number of months’. Spread out the amount over this time and save from every salary.
You can automate the savings with Mkobo bank so your emergency fund is automatically credited every certain day of a new month.
2. Use a separate bank account
As mentioned above, ensure your emergency fund is saved in a separate bank account that is easily accessible.
Read Also: Strategies for avoiding debt and building wealth in 2024
3. Maintain the fund
Where you spend money from your emergency fund, ensure to promptly replenish it.
In conclusion, an emergency fund is an important personal finance tool to have in your arsenal. It can protect you from making huge financial decisions in the wake of emergencies that may haunt you later. There’s also the added benefit of not being overly stressed thinking of how to handle tough times financially.