5 Ways to Build Your Emergency Fund
The answer is YES! As I take this journey to become financially independent the first step to building wealth is to build an emergency fund. This is a kind of insurance against all your hard-earned money vanishing.
Why should I have an Emergency Fund?
The definition of an emergency is an unexpected event. Most of the time, these unexpected events will cost you money. For example, if there is a pandemic and you lose your job. Or you are admitted to hospital for covid 19 and the treatment cost has increased to millions in a week or just days. Your house has a leak and the rainy season is upon us, or your parent is hospitalized or needs to get a procedure done overseas. What do you do?
- Wiping out all your savings
- Selling your assets, like furniture, vehicle, and land
- Take loans from banks, Saccos, mobile apps, credit cards, and mobile apps
- Borrow from family and friends and if you are Kenyan you will need to hold a Harambee (crowdfunding)
To avoid the above and reduce your stress levels it is recommended that you should have an emergency fund.
An emergency fund is funds put aside not to be spent for other expenses other than pay for emergencies. So this is not the money you use when your friend introduces you to a deal you can’t refuse.
How much should it be?
The rule of thumb is to have an emergency fund of 6 months of your basic expenses per month. Therefore, if you earn KES. 100,000 per month your emergency fund should be KES. 600,000 minimum
This will ensure you don’t have to change your lifestyle for 6 months if you lose your job. You should put aside at least 10% of your net salary towards your emergency fund and increase the percentage as your finances grow.
How to build it?
I know. You are asking. “Where are you supposed to get that kind of money to put aside for emergency fund?” especially if there is more month than money at the end of the month. It will not be easy but it is possible to have an emergency fund even when you earn hand-to-mouth. All you need is to put some effort into your finances.
Try the below steps
- Track your expenses daily so that you can identify expenses that you can reduce or go without. You will be surprised by what you spend your money on that you can do without. That is the money you can start saving money. Do you buy lunch every day while you can carry leftovers? how much do you drink over the weekend; can you drink two drinks less? Do you need another lipstick or dress?
- Come up with a budget. Without a budget, your money decided what you should spend on, and you are left wondering what happened to your money. A budget is a plan on what you want to spend on. Take control of your money.
- Pay yourself first. If tax is removed before you touch your money, why don’t you save the same way? Put your savings away before you start spending your money. The best way to do this is to have a standing order on your account that moves the money away from your current account. If you make it inconvenient for you to withdraw the money, then you will find yourself saving and investing.
Once you start investing you will always be asking yourself why you didn’t start earlier.
Where should you put it?
This may sound like it is a lot of money to leave just lying around in the bank. Especially in this day and age of betting apps and get rich quick deals. Many people start building the emergency fund but lose it all on a get rich scheme or deal gone south. The temptation is real.
To avoid using the emergency fund on a whim? Below is what you need to consider as the vehicle to hold your emergency fund.
- It should be safe. That means there is no chance of losing your money. What you put in is what you can get out.
- It should not be too convenient to withdraw the funds. So your current account should not be the place to put your emergency fund.
- It should be easily liquidated in a few days. Don’t put your emergency fund in property or land, treasury bonds/bills, or assets that are not easily liquidated quickly.
- Should ensure you don’t lose the money to inflation. The emergency fund should earn interest that will cover inflation.
- You should be able to access and give instructions to top up or withdraw funds through easy-to-use, secure online portals, and mobile apps.
- It should take advantage of compounding interest. This means that you will reinvest the interest earn which will increase your funds as they snowball over time. A fixed account will not be suitable because it is not compounded the interest.
The best solution for this is a Money markets fund. This is a mutual fund that is low risk and has all the above qualities. It offers about 6% to 10%. To know how to choose the best money market fund click on this link to go to that blog.
