An Igbo adage says that it is the firewood you gather in the dry season that you will use to make fire in the rainy season. I will assume that most (if not all) other ethnic nationalities across Africa have a version of this. That is the wisdom of the ancients. They understood that life is not always a smooth journey. There are hills and valleys, high and low moments, and, therefore, when life presents one with a semblance of plenty, one should not get carried away to the point of eating one’s dinner at breakfast. There is wisdom in setting aside something today for later, especially when something you did not plan for – a sudden medical challenge, job loss, or a major repair to your home or car – arises.
That is basically what an emergency fund is. An emergency fund is referred to as a rainy-day fund. It is like a financial safety net. It is 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. Emergency fund acts as a financial shock absorber, protecting you when you face an emergency. It can be used to meet unanticipated expenses.
If you speak with people who have had to deal with large and unforeseen expenses, it is either they tell you how difficult it was to find the fund they suddenly needed, or how happy they were that they had an emergency fund to tap.
It is not a question of whether an emergency would arise or not. There is a high probability that it would. If it does not, to God be the glory. Yet, pre-planning is key to navigating the tortuous paths of life.
Emergency fund will allow you to live comfortably for a few months if you happen to lose your job or pay for something that comes up unexpectedly without going into debt. The whole point of an emergency fund is to prevent you from having to add to your debt in times of need or to scramble to get money at the last minute. You want to focus on the unexpected, not on raising money to solve it.
This is why everyone should make a point of setting aside something, no matter how little, for unforeseen expenses. It is important to note that you should reserve this money for genuine financial crisis, not for impulse buying. It may be tempting to use emergency funds for incidental or frivolous purposes, or for vacation, buying new shoes or dress for your friend’s wedding, paying off significant debts, or any other significant expense that arises, but if you do, what happens when the real emergency comes? Always create a list of acceptable expenses for your funds and ensure they are actually emergencies. Ask yourself: is the expense an unexpected one? Is it necessary? Is it urgent?
An emergency fund should typically help you to live through three to six months. However, following the 2020 economic crisis occasioned by the COVID-19 pandemic, some expert have suggested that emergency fund should cover up to one year’s worth of expenses. The increased need for an emergency fund was one of the big lessons of the COVID-19 pandemic. According to Investopedia, “The COVID-19 pandemic increased a need for an emergency fund. An April 2021 Forbes survey conducted by YouGov found that the pandemic triggered nearly 40% of people who had emergency funds to access them, with 73.3% using up half or more of the fund and 29% all of it.”
Getting started with your emergency fund
Here are a few steps that will guide you:
(i) Calculate the specific amount you need to have in your emergency fund.
(ii) Open a separate savings account, ideally one with a high – interest rate.
(iii) Set a saving goal for daily, weekly, or monthly contribution.
(iv) Start small if necessarily, but keep the contribution consistent.
(v) Periodically review how much you have, especially when you experience significant life changes like a raise, bonus or a new addition in your family.
(vi) Only use financial cushion for a genuine unforeseen expense, and be sure to replenish it as soon you regain financial stability.
To build an emergency fund, save windfalls or bonuses directly in your emergency backups. Create a budget and cut down on unnecessary expenses to boost your savings, make having an emergency saving a financial priority, set up automatic transfer to your fund until your goal is reached, keep saving net fund in a high interest savings account for maximum growth.
Lastly, remember that 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 will be tempted to spend at a go.
Queen, a personal finance advisor, can be reached via [email protected].
