An important rule in financial planning is to prepare for the future no matter what it may bring.
You’ve lost your job. Your car needs repair. Your house is flooded. You need money to pay for an emergency treatment.
If you’re not careful, these can become a budget disaster. You need to be prepared financially.
An important rule in financial planning is to prepare for the future no matter what it may bring. Therefore a major part of a good financial plan is an emergency fund, which is designed to cover any unexpected expenses. Your emergency fund can serve as a place to get money when you don’t have any. It must be reliable and hold guaranteed investments; therefore savings accounts are good for emergency funds while stocks are bad. Most of the time your emergency fund should not be touched, it should just sit there gaining interest and waiting until you actually need it. There are two types of emergency funds:
– Short-term emergency fund: This account is available for an immediate emergency such as car repairs or replacing a major account that is broken. It should be in an easily accessible account, with a debit card and a cheque book. This can also tide you over until you can access your long-term emergency fund in the case of an extreme situation.
– Long-term emergency fund: This account is used for large-scale emergencies such as a job loss or a major natural disaster. This account has a higher interest than the short-term emergency fund. Accessibility is necessary here, but give it a few days for it to liquidate (while you wait, use your short-term emergency fund).
To start building, we recommend that you:
– Start low: Depending on how much you make, setting a N1 million emergency fund can be daunting and intimidating, and this could take a long time to get there. Make it your initial goal to have an emergency fund of N150,000 or N200,000. That’s a goal that you can reach in a few months (or less time if you are earning a good income).
– Break it down: Break that goal down into smaller pieces. Maybe you can save N10,000 each week; if that’s the case you can have a N150,000 emergency fund in just 15 weeks (just under 4 months!)
– Automate: You have taken out N10,000 and you are tempted to spend it, but don’t. Set up a standing order with your account officer, and you can have N10,000 automatically deducted from your account and placed in your emergency fund.
– Set reasonable milestones: When you reach that goal, it will feel good. That account will have enough money in it to build up interest on its own. All you have to do is keep going – set another goal of N300,000. Don’t forget to automate. Once you reach that goal, aim for a month’s worth of living expenses, then two, then three. Just watch your emergency fund grow.
– Stash windfalls: Any unexpected money, like a raise or money given as a gift, should be put into this account.
Having an emergency fund means that you don’t panic when you lose your job or when you have to repair your car. It means that you don’t have to use a credit card or ask for a loan from a friend. You can sleep well at night knowing that any unexpected expenses will be sorted.
We can help you with setting up an account for your emergency fund. Start here.