Understanding emergency funds
Chioma is a stylish, hot Lagosian girl. She has one of the highest salaries of any employee at the company she works for.
Every year, she takes a vacation, enjoys pricey meals, switches up her outfit three to four times, indulges in pricey skin care products, and drives an expensive vehicle.
Every Saturday, she always goes out with her girls to clubs and parties to unwind after the stressful week she had.
She truly seemed to be living life to the fullest.
She had already reached the peak of her career at age 26. She was already living a luxury lifestyle, earning a lot of money, and maintaining her excellent looks.
Her salary per month was half of what the middle class gets in a year. It was that large. She was the envy of her mates.
She is the breadwinner of her family. She looks after her mother and her two younger siblings. She was working so hard despite her youth, but it didn’t matter because she was making much more money.
Everything was going smoothly until an unexpected tragedy struck. She received the unfavourable news that her mother had a liver condition that would obviously cost a lot.
She was receiving weekly dialysis, which cost at least N100,000 in addition to other medical costs. She was not prepared for this in the slightest.
She had to make many sacrifices in order to take care of the important things, like her mother’s health and her siblings.
Her mother’s liver treatment continued to cost a lot of money until the patient was finally unable to continue and passed away.
Chioma was inconsolable. She would have to deal with the death of her only parent, taking care of her younger siblings, her own needs, and the enormous expense of the funerals.
To make matters worse, she was fired from her job two months after this incident occurred. The business was experiencing a serious setback and was forced to let go of many employees, including the extremely valuable ones.
One didn’t need a soothsayer to tell them that the company wouldn’t survive in the market.
Getting a job would not be a problem for Chioma but how would she handle the situation at hand?
She had a meagre amount of money she saved sometime back but it definitely wouldn’t go anywhere.
Chioma would have been able to handle the situation effectively if she had an emergency fund.
What Are Emergency Funds, Then?
An “Emergency Fund” is a financial safety net for unforeseen bills and future accidents.
It is money that has been set aside for use by individuals through difficult financial circumstances.
Call it a cash reserve that is particularly set up to cover unforeseen costs or financial emergencies, such as the death of a loved one, costly repairs to your car or home, unexpected medical expenses, losing your job or other source of income, etc.
What purposes serve emergency funds?
They are utilized to pay off large or little unanticipated debts or payments that are not included in your regular monthly spending and expenses.
Why have Emergency Funds?
In times of financial hardship, emergency funds can be a lifesaver. It is a requirement for everyone because unexpected events in life can cause you to lose everything you’ve worked so hard for.
Without emergency reserves, even a minor financial shock could result in a significant setback in your life since you are ill-equipped to handle it.
Wishing for the better and asking God to remove obstacles are insufficient. Nobody likes them, but since they occasionally occur due to the nature of life, it is essential to plan and be prepared for them.
Benefits of having an Emergency Fund
- Acts as a safeguard against severe financial losses.
- Reduces stress: Emergencies like job loss, car accidents, and fire outbreaks can cause stress.Without access to emergency money, those who are affected often experience physical and mental exhaustion while attempting to find a solution. Having an emergency fund helps them avoid situations like this that could be harmful to their health.
- Encourages Saving habits: It pushes people to save and refrain from impulsive spending, which promotes good saving habits.
- Avoid Bad Debt: People don’t need to think about utilizing bad debt, such as high-interest credit cards, to resolve their financial problems if they have an emergency fund.
Where to keep Emergency Funds
Maintaining a separate emergency fund from your other bank accounts is recommended. It should be nearby but out of your reach so that you are not tempted to take from them.
They can be kept in:
- High- Yield Savings Account
- Money Market Accounts
- Traditional Bank Account
- Certificate of Deposit
How much emergency cash do I need?
Experts advise keeping three to six months’ worth of living expenses in reserve as an emergency fund, however there is no set amount that must be kept there.
Some people advise keeping up to a year’s worth of living expenses on hand in case anything similar happens again in the future due to the 2020 lockdown and economic catastrophe.
Building an Emergency Fund
You’ll need to gradually increase your emergency money account over time unless you get an unanticipated bonus, a large commission, an inheritance, or a sizable financial gift.
- Set a goal for your emergency fund savings: Create a thoughtful objective for your account.You should aim to save enough money for at least three months’ worth of spending. You ought to think about setting aside six to a year’s worth of this if you are the primary provider.
- Calculate how much you’ll set away each month for this: Obviously, this should depend on your monthly income as well as the obligations you bear. Have the self-control to save between two and ten percent of your monthly income.
- Transferring your regular savings to a different account Just think of it as another monthly expense. In order to resist the desire to touch it, it should be placed in a different account. Put it on autopilot by establishing automatic transfers, or request that your employer transfer a specific amount of each paycheck to the account.
Everyone has to have access to an emergency fund. It can provide you financial freedom, peace of mind, and a better sense of control over your money.
When you’re not in the midst of an emergency and can change your aim as needed, that is the best moment to start developing an account. Right now is the ideal time to begin.