Setting up and maintaining an emergency fund is an important money habit any one who desires financial freedom must cultivate
One can define an emergency fund as the big brother you run to when there is a serious financial issue beyond immediate control. It is a stash of funds that must be built over time, and not one that is tampered with within short intervals.
Life plays a very funny game of hitting us with unpleasant surprises sometimes, with an emergency fund though you can beat life at its own game. These funds come in handy when faced with job loss, health emergencies, natural disasters etc.
In this article I highlight:
- Benefits of an emergency fund
- How much you should have in your emergency fund
- How to set up your emergency fund
Benefits of an Emergency Fund
An emergency fund has the major function of putting your mind at rest in the face of a crisis, as opposed to when you have no investment whatsoever to help abate the sudden impact of an emergency. That is, emergency plans can serve as a stress reduction agent.
Other benefits of owning an emergency fund include:
Protection of other investment goals. With an emergency fund set up there will be no need to seek liquidation of other investments targeted at certain objectives you are building up to. You can read more about this in the Code of Depth and how it impacts your investment journey.
Financial discipline. Stashing money away to hedge against life’s risks can help build your financial discipline and help cut down drastically on frivolous spending.
Low financial burdening. with an emergency fund you can avoid borrowing and putting yourself in further distress when there is a crisis.
How Much Should I have in my Emergency Fund?
The generally accepted amount one should target annually, based on suggestions from top advisors globally, is six months of living expenses. That is you should work towards gathering up an amount that can cater to your living expenses for six months in case you run into an emergency that blocks your income flow for six months.
“The generally accepted amount one should target, based on suggestions from topadvisors globally, is six months of living expenses. For example,if your monthly living expense is N200,000, your emergency fund should beN200,000 X 6 = N1,200,000. You can build this over 2 years by saving N50,000monthly".
How do I Set up my Emergency Fund?
#1. To save up six months of living expenses you will have to first know how much you spend in a month and multiply it by six. You can divide this amount by 12 or 24 to determine how much you need to set aside monthly as savings to hit your emergency fund goal. More importantly, automate the process of saving up for this fund.
#2. Although an emergency fund is set up to help you prepare for unforeseen circumstances, there is nothing wrong in earning some interests on your fund. Therefore, it is advisable that you invest the funds and you should go about that by investing them in secure vehicles that can guarantee your returns.
#3. With a Cowrywise periodic plan, you can build up for emergencies. Simply set up a plan with a minimum lock-up period of a year. This provides you with the needed discipline to actually build up. Secondly, your funds are invested in secure vehicles like treasury bills and government bonds which have been adjudged to be the most secure forms of investment in the country. With that, your funds earn you interest as they build up.
Cowrywise is a platform tailored for Africans to help them build wealth through free advisory, and automated savings and investments. You can reach out to them on Twitter, Instagram or Facebook: Cowrywise.