What is an emergency Fund ? An emergency fund is an easily accessible account that is used to set aside funds to be used in case of emergency, such as the loss of a job, an illness or a major unexpected expenses. The purpose of the fund is to improve financial security by saving into an account that can be used to meet emergency expenses as well as reduce the need to use expensive debt as a last resort.
Life will never be predictable. That’s okay, we can handle that if we think ahead.
The idea behind an emergency fund is to save part of your income for in case of an unexpected event. In life you should expect the unexpected at any time. In case you need to do some work at home e.g water leakage, car breakdown etc. These issues are unavoidable and almost cannot be controlled. This is why everyone need an emergency fund.
Global issue – many people without proper savings
The issue of bad savings culture is not peculiar to only Gambia or Africa, it is a global issue. According to CNN personal finance site, roughly 75% of Americans are living paycheck-to-paycheck, with little to no emergency savings to help cushion the blow of a job loss or medical emergency.
Your failure to plan today should not be someone’s emergency tomorrow.
How much should I have in my emergency fund?
The amount to save as emergency savings depends on the individual and family life situation. However, most financial experts recommend a saving of about 6 months of living expenses. Some people may need more money compared to others. For example, a person with children and without any medical insurance cover, will require more money in emergency fund account compared to someone with good insurance cover. Similarly, a person with many dependents and cars to service, will require more money in the emergency funds than that of a single family.
To assess your emergency funds need, simply follow the steps below :
- Prepared a personal or family budget – Make a list of your regular monthly expenses such as housing costs, food, utilities, debt repayments, transportation costs, insurance and any other “must-pay” bills.
- Total the above expenses and multiply the results by 6 (the six months). For example, if the total expense amount is about D5,000, it means you’ll need to set aside D30,000 in your emergency fund.
- Start a special savings account – You do not have to save the full D30,000 in one month. Assess your financial condition and decide on how much you can save. You can start with a small amount, say D1,500/month and accumulate it over time. Of course, someone who spends D5,000 per month should be earning more than D6,000 per month. Except a type 4 person in wealth creation ( keeping ups).
Someone may ask, Why 6 months?
It is based on general concept which assumed that it may take about 6 months to get another job or source of income. You will still have bills to pay during this period. My best advice for anyone is to start something and adjustment as your conditions change.
The best account for Emergency Fund
The answer is very simple; an account that is safe and where you can easily get access to the fund, when you need it. Do not invest your emergency fund or short-term savings into risk products such as shares or mutual funds. These markets are very volatile and could cause you to lose money.
The best account for emergency funds is the bank savings account. These accounts are simple to operate and generally does not cost anything. As the fund balance grows, you can consider other short-term liquid accounts such as fixed deposit (certificate of deposit) and government treasury bills.
Can emergency fund be use for other purposes ?
As the name implies emergency fund should only be use for real emergency situations such as a job loss or health issue. Funds needed to do naming ceremony or travel for holidays are not emergency and if you want to save for such occasions, please put them into a separate savings account. Your emergency fund is your safety net. It is the money that will keep you safe when something goes wrong.
Finally, if anytime you used part of your emergency fund, you should quickly try to bringing it back up to the full amount.
I know “to save money” does not sound fun to many people, but establishing an emergency fund should be a priority in your personal finance management efforts.