What is Emergency Fund; Importance of Having an Emergency Fund

An emergency fund is money that you have set aside to cover any unexpected expenses that may come up. May include anything that you haven’t planned for, such as unexpected car repairs, medical bills, unemployment or other income loss, property damage, or family emergencies.

Why You Should Have an Emergency Fund

Although it may seem like a sacrifice, setting aside money  in an emergency fund can provide you with true peace of mind and help you move more gracefully through otherwise stressful situations. It allows you to focus on taking care of the problem at hand without the additional worry about finances during a crisis. The sooner you start on your emergency fund, the sooner you can take advantage of these benefits. 

Your emergency fund is also a way to protect your savings. For example, if you’re saving for a home, and you have a medical emergency, you will not need to dip into your down payment savings to cover the costs. Instead, you’ll use your emergency fund for that. This can help you to continue to move forward with your financial goals even when you face the unexpected

How to Start an Emergency Fund

Before you start an emergency fund, it’s a good idea to set a savings goal. The ideal goal amount for your emergency fund will depend on a number of factors, including your income, costs and bills, lifestyle, and number of dependents. If you work in a field where layoffs are common then it’s wise to save more rather than less.

A common recommendation is to build your emergency fund to cover at least three to six months of expenses. However, if that seems daunting, then you can start with a smaller, more attainable goal.

When you’re ready to start, take the time to select the right account to hold your emergency fund. You should look for an interest-earning account that lets you access your money quickly if needed.

How to Build an Emergency Fund

Once you set your initial savings goal and set up an account, it’s time to build up your emergency fund. To make sure you’re consistently contributing to your emergency fund, you can work with your financial institution to set up automatic transfers from your checking account to your savings. You can also commit to contributing to your emergency fund when you receive sums of money outside of your core income, such as gig jobs, income from hobbies and interests, gifts, bonuses, and tax returns.

The following are ways to build your emergency fund.

1. Have a target

This can be done by calculating how much you will need for a period of time, say 6 months. Have it stipulated to the most minute detail so that every need is catered for in the total figure.

2. Set a proportion to save from your income

One of the ways to do this is by transferring money to your emergency fund every time you get your paycheck. Doing this will develop, in you, the habit of saving regularly and will make the saving less daunting.

3. Automatically move money into your savings account

If your employer allows direct deposit, then it is possible that they can divide your salary between multiple checking and your savings accounts so that your monthly savings is done without having to touch your account.

4. Have a piggy bank

Piggy banks can also be used for grownups. You could save up the change you receive from regular shopping etc. Like when you go to the supermarket and they give you Ksh5 coins as change. You don’t have to dispose of them. Save them up then deposit them in your savings account when the piggy is full. A personal favourite for me, is the rarer Ksh40 coin, that I always ask for if the change is in that region. I probably have 200 of these coins by now – that’s a cool Ksh8,000 I have saved up in what is really a fun activity for me. 

5. Save your tax refund

While filing your taxes, consider getting your refund deposited directly into your emergency fund.

6. Assess and adjust contributions

Check on the health of your account after a few months just to see how much you’ve saved, and adjust if you are able or if needed, especially if you recently have withdrawn money from your emergency fund. Also consider investing any additional income if you’ve saved up enough to cover six months of expenses and have extra cash.

5 Reasons Why You Need an Emergency Fund

1. You Just Started Budgeting

When you first begin budgeting, you may be unconsciously leaving out some of the very important expenses that need planning for. The fund is able to cover some of the expenses the first year, then you can proceed to add those expenses into your budget as they arise. These could be expenses like fees for organizations.

2. You’re Trying to Pay Off Debt

An emergency fund can help us stop adding to our debts with every financial challenge encountered. It can help in covering for the things you haven’t budgeted for, like vehicle repairs or medical expenses. You can use it to handle these very stressful events and make it better and easier for you to stay focused on your path to get out of debt.

3. You Have Medical Issues

Having a serious medical condition can be draining, and cause you to wipe out your hospital insurance each year. Also, some routine tests could add up quickly or need to use all of your sick leave days, and you end up taking days off with no pay. A good size emergency fund can help you through these costs and make it easier to get through these challenging moments.  

4. You Only Have One Income Stream

If you only have one job, it means you have one source of income. It is important to have a substantial emergency fund. This could help to get through an illness that keeps the primary breadwinner from working or an unexpected job loss. Having, at least, a six months’ worth of expenses in your emergency would cushion you in case the unthinkable happens.

5. You Have a Saving Goal

If you have a set financial target and are saving towards it, your emergency fund can prevent you from digging into those savings when unanticipated costs arise. This will help to not be pushed steps behind on your path towards your goal.

Winding up

It is important to remember that emergency savings is for emergency only. As you begin growing your emergency savings account, set some boundaries on when and how you will use that money. Ensure also that you should be parking your emergency savings in an account that offers a solid interest rate. The higher your annual percentage yield, the more quickly your money can grow.