12 Oct 2014

DAY 18:Set Aside Part Of Your Savings As An Emergency Fund



 Like the name suggests, it is a special savings account set aside for emergencies. In other words, your emergency fund is money you set aside for the sole purpose of having a cushion for soft landing should an emergency come up,and it should be easily accessible/convertible to cash if and when needed. Emergencies include a job loss, a medical emergency, a natural disaster or catastrophe, or some other major expense.

J.D Roth of getrichslowly.org says, 'It may feel like you can’t afford to have one, but the truth is you can’t afford not to have one.'


There is really no fixed amount or percentage advocated, but some experts say our emergency fund should contain an amount equal to six times the amount we spend per month. While some others say it should contain a minimum of six times your present monthly salary. This is especially important for us as Nigerians as most of us don't have any form of insurance whatsoever- health, car, house, etc.

Some experts also advocate having part of it on hand as cash.
The question is how should you build your emergency fund and where?

You can start by setting aside at least 10% of your income every month in the special emergency fund. Then as you further are able to spend less, you can increase your savings to the fund up to 20% of your salary till you reach your target.

You can also give your banker a special order to withdraw the funds from source (immediately your salary comes in before you even see it) and transfer it to the emergency fund. Or you can keep it with your general savings and when it reaches your target amount, you withdraw it into a easy-to-access mutual fund.

Alternatively, you can insure yourself against whatever emergency you feel is likely to occur. Car insurance, House insurance, Life assurance and so on, are other ways to prepare yourself for the unexpected.

What I advocate is disciplining yourself and becoming able to live on the salary of the upper month, this month. In other words, if you can adjust your expenses to the extent that you spend August's salary in October,  and so on till you can confidently spend July's salary in October, etc. Then, you will be able to save three months salary and then finally get to your target of six months salary saved in an emergency fund.

It won't be easy. But if you are determined, you will get there. I wish you all the best building your emergency fund.

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