Have you ever lost your job? Has your car ever required an expensive fix? Have you or a family member ever needed funds for an expensive, emergency hospital visit?
Now imagine that you didn’t have a medical insurance cover or readily available cash to pay for that emergency. What would you do?
Recently, many sectors of the Kenyan economy have experienced shake ups that have led to job cuts. Some are downsizing, merging or selling out. In the process, they have rendered some of their employees redundant.
You certainly could do something to cushion yourself against the after-shocks of a job loss or just generally against the disruptions of the uncertainties of everyday life.
If the unexpected happens, how would you pay next term’s school fees for your child, pay rent or afford treatment, at least in the short term as you figure out the next source of income?
About two years ago when I was working in the media, media houses began converging certain functions in their newsrooms. This caused panic and uncertainty among journalists. No one knew what to expect. Many lost their jobs.
The questions those who lost their jobs were battling with caused me to put things in to perspective. I had been saving, but after doing some research, I realized that that alone was not adequate. I needed an emergency fund. An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly.
I realized that this was one of the most commonly ignored components of financial planning. To mitigate against major financial crises, like job loss, significant medical expenses, home or car repairs, I needed to have a huge chunk of money stashed aside to easily pay for these things. The last thing I wanted was to be forced to rely on credit cards or a loan which would only make my problems worse.
My reality finally came crushing down hard on me, when an unfortunate robbery incident happened at my mum’s home in Mombasa. Thieves broke in while mum was away and stole electronics and other valuables. More than the loss of property, she was in fear and shock and felt that her privacy and security had been compromised. Since they broke in through the roof, she was in distress and couldn’t sleep that night because she was afraid they would return to do worse.
The only way to reassure her safety was to change the roofing, reinforce the perimeter wall, add more spokes on the gate and to seal any loop holes. This needed to happen as soon as the sun rose the next day. Cash was immediately required. I knew that doing this would finally give her peace of mind. There’s nothing as bad as feeling unsafe in your own house.
I financed all the repairs she required with the little emergency fund I had managed to build up. If I had done it off my life savings, I would not have been able to do it comfortably. The repairs totaled to Sh 100, 000 and I’m glad that my mum now sleeps soundly in her house.
An emergency fun ensures you don’t deplete your savings.
Investor.vanguard.com has outlined some of the advantages of saving for a rainy day.
1. It helps keep your stress level down
Being prepared with an emergency fund gives you confidence that you can tackle any of life’s unexpected events without adding money worries to your list.
If you’re living without a safety net, you’re living on the “financial edge”—hoping to get by without running into a crisis.
2. It keeps you from spending on an impulse
You’ve heard the saying “out of sight, out of mind.” That’s the best way to store your emergency money. If the cash is only as far away as your closest debit card, you may be tempted to use it for something frivolous like a designer cocktail dress or big-screen TV—not exactly an emergency.
Keeping the money out of your immediate reach means you can’t spend it on a whim, no matter how much you’d like to.
3. It keeps you from making bad financial decisions
There may be other ways you can quickly access cash, like borrowing, but at what cost? Interest, fees, and penalties are just some of the drawbacks.
If you find it difficult to save money the key is to start small. Accumulating one month’s worth of expenses will take some time, but if you set your immediate goals to be small and manageable you will have a better chance to reach them.
The best way to get started would be to open up a new savings account, because it’s important to separate regular savings and emergency fund savings. The next step is to get into the habit of making regular deposits into this account. Whether it is weekly, bi-weekly or monthly, create a schedule and stick to it. The other challenge that bogs most people down is discipline to save regularly. To beat this, use a standing order service to automate deposits from your salary or current account, and you won’t even have to think about it.
How much should you save?
Your ultimate goal should be to have enough money in an emergency fund to pay your essential expenses for several months. Some experts say six months, others nine, or twelve.
Helpful tips to help you build my emergency fund:
• Direct Deposit. If you’re tempted to spend extra cash, set up a direct deposit into your separate emergency fund account. (Pay yourself first.)
• Bill Yourself. Treat your monthly emergency fund allotment as a bill—like rent or your electricity payment. Remember to deposit that amount into your savings on whatever day of the month works for your situation. (Same idea as above; pay yourself like any other bill).
• Add Bonus Money. Use things like side hustle cash, unexpected windfalls or cash gifts to add a boost to your contingency fund.
I hope this was helpful. Share with me in the comment section how an unexpected emergency caught you off guard and how you handled it.
This article was first published on the ABC Bank Kenya Blog on 7th February 2017