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 is 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 an emergency fund.
That being said, if you have a steady stream of income, an emergency fund 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 emergency 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 emergency fund goal. An example could be having up to six-month 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 emergency 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 helps you track spending habits.
Where do I keep my emergency fund?
The general rule of thumb is to have your emergency funds 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.
Avoid investing your emergency fund in short to long-term investments that are difficult to liquidate.
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 emergency 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.
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 taking 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.
Where you have the means to fund one, consider having an emergency fund with Mkobo bank. On Mkobo you will have access to a suite of features to ease your setting up, automating and running an emergency fund. This is in addition to making some extra income from industry-best interest rates.
Do you have some thoughts to share on emergency funds?
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