If there is one thing that the COVID-19 pandemic taught us all, it is the necessity of an emergency fund. We need resources that would act as shock absorbers to soften the blow of unexpected events like medical emergencies, loss of income, house repairs or any other unplanned bill, outside the routine expenses, that could be potentially crippling. Experts recommend an emergency fund of between 3 and 6 months worth of living expenses as part of your financial health plan.
Why do you Require an Emergency Fund?
Unexpected financial expenses like say job losses or medical bills could potentially put you in financial shock. Without an emergency fund, you are likely to fail to deal with the eventuality, pull funds from other long term financial goals like retirement funds or worse, rely on quick loans which are expensive to pay off and shake off.
Unfortunately, not many are able to deal with emergencies if they were to occur today. 8 out of ten Kenyans above the age of 18 cannot deal with an emergency if it occurred today. 21% could raise a lump sum within three days, and only 35% have kept money aside for the future.
Are you able to respond financially if you encountered an emergency today?
How to Build an Emergency Fund
The first step is to out how much you need for a month by noting down your monthly expenses. Rent, transport, food, utilities are likely to make up that list. Multiply the expenses for a month by three. That is your initial emergency fund.
Next is where to put it. Pick a channel that you can easily deposit and withdraw the money in case you need it. Think of channels that you can deposit through mobile money, or automatically with little cost. Consider a platform like Cashlet, which allows you to easily monitor your savings through your phone, and lets your emergency fund earn interest through unit trusts.
You will then need to dedicate an amount of money you would like to put into your emergency fund. Treat your emergency fund like any regular monthly expense and, if possible, take advantage of one time windfalls like money you did not expect or tax breaks to turbocharge your emergency fund.
Finally, create a list of what qualifies as an emergency to avoid dipping your fingers into your rainy-day fund at the slightest inconvenience. Happy savings!