Life is unpredictable. Everything might seem okay now, but what if you suddenly have an emergency and need money the next minute? When faced with such an emergency and having no money to cover unexpected expenses, you might go through a lot of stress. Let’s look at everything you should know about an emergency fund.
Sometimes, things happen when you least expect them.
Like your phone being stolen – now you have to buy another one. Or you were losing your job due to massive layoffs happening worldwide. Considering that we’re still facing the effects of the pandemic, you might even find yourself paying medical bills you didn’t plan for.
All of these situations are financial emergencies that can happen at any time. Plus, unexpected expenses can hit at the worst times.
An emergency fund helps you pay for living expenses when you’re laid off or during other emergencies. You can also use emergency savings to cater for other unforeseen expenses like medical bills not covered by insurance.
What is an Emergency Fund?
An emergency fund is money you set aside to meet unexpected expenses in financial distress. It helps improve your financial security by creating a safety net.
Let’s say you’re laid off tomorrow. It might take some months before you find another job. So, how will you pay the rent, feed yourself and your family, etc., until you’ve secured a new job?
Life can be tricky and stressful if you have no savings to pay for your living expenses in such scenarios. If you have no extra cash, you may take a loan or use your credit cards, which attract high-interest rates.
Instead, you can avoid the cost of borrowing emergency loans and using credit cards by having an emergency fund.
Why Do You Need An Emergency Fund?
Having a cash reserve set aside to cover unexpected expenses is always wise. This not only ensures financial stability but also offers several other benefits.
For instance, an emergency fund serves as a safety net during tough times, gives you peace of mind, and prevents you from taking on high-interest debt in a financial emergency.
An emergency fund can also help you maintain your daily expenses without disrupting your long-term financial goals.
1. Keeps Your Stress Levels Down
If you live without a safety net, you are living on the edge and hoping to get by without getting into a crisis. However, when life presents an emergency threatening your financial well-being, you can suffer a lot of stress.
It’s best to prepare for any eventuality with an emergency fund. Setting aside cash for unforeseen expenses gives you the confidence to handle unexpected events. All you need is to open a savings account and save a little daily, weekly or monthly.
2. Saves You from Making Bad Financial Decisions
What comes to mind when a financial emergency knocks on your door?
You could take out a loan or sell your property, which could cost you money. A loan attracts interest rates. In addition, failure to repay your loan leads to penalties and lowers your creditworthiness. Then there’s selling your property at a throwaway price to get cash for your emergency.
With an emergency fund, you can meet unexpected expenses without incurring further costs. Remember, sound financial decisions help you build wealth.
3. Keeps You from Spending on A Whim
Storing money away from you is the best way to retain emergency money. You are tempted to spend your cash when smoothing small arises if you have it near or on a debit card.
Keeping money out of immediate reach means you won’t spend it on a whim. Get a separate account and begin saving for emergencies.
Type of Emergency Funds
1. Job Loss Emergency Fund
Do you work for the Nigerian government? Or are you employed by a private company in Nigeria? The Nigerian economy is facing a lot of challenges. Many businesses are laying off workers to reduce operational expenses.
You might lose your job when you least expect it.
Losing your job leaves you with no money to support your lifestyle. However, you can survive with emergency savings while determining what to do next.
A job loss emergency fund lets you set money aside while working to support your life if you’re laid off.
2. Medical Bill Emergency Fund
The cost of medical treatment in Nigeria is high, especially for diseases that need specialized treatment. Medical insurance only covers some things.
So, a medical emergency fund helps pay for bills not covered by your health insurance.
3. Home Repair Emergency Fund
If you own a home, you might need some repairs occasionally. You may want to replace the roofing due to leakages, or your home might need repainting, which comes with a cost.
Such repair works arise when you need the cash. But with an emergency repair fund, you can withdraw and pay for repairs anytime.
4. Car Repair Emergency Fund
A car comes with pride and class! However, cars require maintenance, which can be costly. What if your car breaks down in the middle of Lagos city, and you don’t have even 1 Naira in your pocket?
A car repair emergency fund saves the embarrassment of car issues and failure to meet the repair expenses.
How Much Money Should You Put in Your Emergency Fund?
Building an emergency fund is an essential part of financial planning. It provides a safety net for unexpected expenses and helps you avoid debt. But how much money should you put in your emergency fund?
At a minimum, financial experts generally suggest having three to six months’ worth of living expenses saved.
This amount should be enough to cover your essential expenses, such as rent/mortgage payments, utilities, groceries, and transportation costs, in case of a job loss or other unexpected financial setback.
However, the amount you need to save may vary depending on your circumstances, such as your job security, health, and family situation. It’s always better to be safe than sorry, so start building your emergency fund today!
Let’s say you spend ₦30000 monthly to fund your living expenses. Then, you need to save at least ₦90000 in your emergency savings account.
Do you have people who depend on you?
It could be your spouse, parents or children. If you have dependents, you should have an amount in your emergency fund that can cater to your living expenses for six months.
Steps on How to Build an Emergency Fund
To build an emergency fund and reduce stress, follow these steps:
I. Track your Expenses
- Begin by tracking your monthly expenses. How much do you spend on travel, groceries, entertainment, fuel, and rent?
- You can use an Excel spreadsheet to log your three months’ expenditure. That gives you a baseline figure of the money you spend. However, an emergency savings calculator is also ideal for determining what you can save.
ii. Budget
- Budgeting gives you a baseline estimate to use as your goal. Ensure you come up with a budget that accounts for your emergency fund.
- You should assign an amount towards the fund. The amount doesn’t matter; even a minor amount encourages you to build a saving culture.
iii. Figure Out What to Save Every Month
- Develop a monthly saving goal.
- If the household expenses are ₦30000 each month, you need to save ₦90000 in your emergency fund, which can take care of 3 months’ expenses in case of income loss.
- So, you can start saving ₦7500 every month to have ₦90000 by the end of the year.
iv. Automate Your Emergency Savings
- Savings-focused apps can help you save automatically after a purchase transaction.
- You only need to link your phone with other spending accounts to ensure some amount is transferred to the savings account as needed.
v. Adopt a Direct Deposit System
- You can divide your pay cheque and ask your employer to send part of your salary directly to the emergency fund savings account if employed somewhere.
- This way, fulfilling the monthly saving goal is easy without touching your account.
vi. Save on Tax Refunds
- The government of Nigeria offers tax refunds to taxpayers every year. You can deposit the returns into the emergency fund. Such savings boost your financial safety when an emergency arises.
vii. Adjust Your Contributions Towards Emergency Savings
- Do you often go on vacations, overload your card, or usually eat out? Choose where to cut down expenditures and save the cash in your emergency fund instead.
- You may find it hard to forego things in your lifestyle, like buying new clothes every month, but you can make it happen.
viii. Bring Your Spouse Onboard
- You don’t have to get a joint account with your spouse. However, you can agree on what to save into an emergency fund and work towards it.
- Your spouse can help save when shopping for groceries and other items. Such savings can then go into emergency savings.
Where Should You Keep Your Emergency Fund Safely?
- Keep your money in a high-yield and safe savings account
- Store your money in an easily accessible savings account with a high interest rate
- Money market accounts are also a good option
Situations When You Should Spend Your Emergency Fund
- To meet financial obligations caused by job loss
- Pay medical expenses that your insurance provider does not cover
- Pay for emergency travel expenses
- To finance expenses arising from unexpected home repairs
Where Can I Invest My Emergency Fund?
- Consider a certificate deposit with a bank
- Invest in sovereign treasury bills
- Choose the fixed deposit option from Nigerian banks
- Invest in Dollars through investment Apps
Conclusion
Long story short – set money aside to pay for unplanned financial expenses when they arise.
An emergency fund offers significant financial safety. Without money to meet unexpected financial needs, you can struggle with anxiety and stress. Emergency funds keep you from regretting financial decisions like taking expensive loans to finance emergencies.
You can invest your emergency funds in high-yield interest, money market accounts or bitcoin networks and grow your emergency savings.
Allows you to invest in dollars, build on your dollar savings and get high returns, helping you grow your emergency fund tremendously.
F.A.Q.s
1. Which fund is best for an emergency?
A savings account is ideal because you can get liquidity in an emergency.
2. Where can I put the money instead of a bank?
- High-yield checking accounts
- Certificate of deposits
- Money market accounts
3. What’s the 50-30-20 budget rule?
A 50-30-20 rule is a budgeting technique where 50% of your income goes to pay for your needs, 30% for your wants, and 20% for paying debts or into savings.
1. How do I calculate my emergency fund?
You can use an emergency fund calculator. Alternatively, you can add up your monthly living expenses and multiply them by 3 or 6.
2. How do you grow your emergency fund?
- Keep on saving
- Invest in a high-yield savings account
- Invest in money market accounts
- Invest in mutual funds
- Invest in dollars with high returns