Emergency Funds - Part 1

What happens in the case of an emergency? – Planning for the rainy day

We all know that life happens and the unexpected expenses are expected. It could be a job loss, wedding of a family member, natural disaster, death, illness etc. For example in 2012, there was a nationwide strike, where all citizens in Nigeria stayed at home for about a week. It would have been a different story if it lasted for more than 1 week especially for those Nigerians that depend or survive on what they earn on a daily basis. I remember in 2008 during the credit crunch, a lot of people lost their jobs globally. A friend of mine who had a very good job in one of the world’s top investment banking firms lost her job. She didn’t see this coming. How was she supposed to survive if she hadn’t planned ahead of time?

There is a bible verse that says “A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences”. (Prov 27:12). This is very apt. Anything can happen at any time. This is life and that is just the way it is. Ask yourself a few tough questions: What would happen to you and your family, if you lost your job today? What if you discovered you had an illness that could not be treated in Nigeria and you would have to go out of town? What if the bread winner in your home suddenly develops an illness and is required to stay at home for a while?

What is an Emergency Fund?

According to Investopedia, an emergency fund is an account that is used to set aside funds to be used in an emergency, such as a loss of a job, an illness or a major expense. Most emergency funds are highly liquid which allows quick access to funds which is vital in emergency situations.

An emergency fund could either be short-term or long-term. A short term fund is more liquid than a long term fund for example a savings account while a long term fund would be invested in money market funds or fixed income funds.

How to create an emergency fund

Typically financial planners recommend that your emergency fund should be able to cover atleast 3-6 months of living expenses. For the purpose of this exercise we would assume 6 months.

1.      The first thing to do is to determine what your monthly living expense consists of. This is easy if you budget on a monthly basis. If you do not have one you would have to create one by first of all tracking your spending etc. Please check my blog and read up on previous articles on budgeting.

2.      Once you determine your monthly living expense, the next thing to do would be to multiply it by six to determine the minimum amount that your emergency fund should contain. So for instance if your monthly living expense is N100, 000, your emergency fund should be N600, 000.

3.      Determine how much you can afford to put aside each month to set up an emergency fund of N600, 000. This would depend on your monthly income and expenses as well as the deadline you set for yourself to have an emergency fund. So for instance you can decide to set aside N30, 000 each month towards your emergency fund. This means it would take 20 months to build up your emergency fund.

                                                                               …………………………..To be continued