A lot of times, you’ve heard about savings and investments and how important they are, but one underrated saving option is the emergency fund. Life is full of surprises, some delightful and others not so much. While we can’t control every twist and turn, we can certainly prepare for the unexpected.
Building an emergency fund is one of the most effective ways to do so. Everybody needs an emergency fund; if you’re living in Nigeria, you need it more. In this article, we’ll talk about why building an emergency fund should be your top priority.
What is an emergency fund?
An emergency fund is a designated amount of money in a savings account to cover unforeseen expenses or emergencies. It acts as a financial safety net, providing a cushion to handle unexpected financial shocks without resorting to borrowing or derailing your long-term financial goals.
The primary purpose of an emergency fund is to provide immediate access to funds during unexpected situations that could disrupt your financial stability.
Seven reasons you should build an emergency fund
Cushion against the unexpected
Have you ever needed money urgently because you had to pay a medical bill or lost your phone or even your job? Life has a way of surprising us when we least expect it. Having an emergency fund ensures you’re ready to handle unexpected financial burdens without resorting to borrowing. A good example of this is during the Covid-19 pandemic when many people lost their jobs. An emergency fund would have served as a cushion to ease the impact of the financial strain. This cushion can make all the difference in maintaining financial stability during challenging times.
Reduce stress and anxiety
Financial stress is a common source of anxiety for many individuals. The constant worry about how to cover unforeseen expenses can take a toll on your mental and emotional well-being. With an emergency fund in place, you’ll be confident that you can handle whatever comes your way, helping you alleviate stress and enjoy a better quality of life.
Avoid debt traps
Relying on loans to deal with emergencies can lead to a debt trap that’s hard to escape. You are never so sure of how things are going to turn out. Also, high interest rates can accumulate quickly, leaving you with a mountain of debt. With an emergency fund, you can avoid falling into the trap of borrowing money at exorbitant costs.
Preserve long-term financial goals
When an unexpected expense arises, it’s tempting to dip into your long-term savings or investments. However, this can derail your progress toward important goals like buying a home, funding your child’s education, or retiring comfortably. An emergency fund safeguards these aspirations by providing a separate pool of funds specifically designated for unforeseen situations. That way, you don’t have to use the money you save for retirement to buy a new phone.
Maintain lifestyle stability
Financial emergencies can disrupt your daily life and impact your ability to cover necessities. With an emergency fund, you won’t have to compromise on essentials like rent, transport, and food, even in the face of unexpected financial setbacks. This stability ensures that you can maintain your standard of living regardless of external circumstances.
Capitalize on opportunities
Not all financial surprises are negative. Sometimes, opportunities arise that require immediate funds, such as a chance to invest in a promising venture or take advantage of a limited-time offer. An emergency fund shields you from unexpected expenses and positions you to seize favorable opportunities without disrupting your overall financial plan.
Flexibility and control
Having an emergency fund gives you a sense of financial empowerment. You’ll have greater control over your life and the ability to decide based on what’s best for you and your family rather than being forced into hasty choices due to financial pressures.
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How to start building an emergency fund
- Set clear goals: Determine how much you want to save in your emergency fund. A common guide is to aim for three to six months’ worth of living expenses, but your goal might vary based on your individual circumstances. Consider factors such as job stability, family size, and financial responsibilities. Ultimately, choose what works for you.
- Calculate monthly expenses: Calculate your average monthly expenses, including rent, cost of foodstuff, transportation, utilities, and other necessary bills. Multiply this figure by the months you want your emergency fund to cover. This will give you a target amount to aim for.
- Start small: If you’re new to saving, don’t feel overwhelmed by the target amount. Start with a small, achievable goal, and gradually work your way up. The important thing is to begin building the habit of saving for emergencies.
- Create a budget: Create a detailed budget to understand where your money is going. Identify areas where you can cut back or reduce unnecessary expenses. Allocate a portion of your income to your emergency fund in your budget, treating it as a non-negotiable expense.
- Open a separate account: Open a separate savings account specifically for your emergency fund. A separate account makes you less likely to dip into the fund for non-emergencies. Look for accounts with no fees and a decent interest rate to help your fund grow.
- Set up automatic transfers: Automate your savings by setting up automatic transfers from your main account to your emergency fund account. This helps you to be consistent and eliminates the temptation to skip saving for that month.
- Choose an account that isn’t too accessible: While your emergency fund should be easily accessible in times of need, it’s also important to prevent easy withdrawals for non-emergencies. Look for an account that balances accessibility and a slight barrier to withdrawing funds impulsively.
- Build gradually: Don’t pressure yourself to build your emergency fund overnight. Building it gradually over time is perfectly fine. Stay consistent with your contributions, and celebrate whenever you hit a goal.
- Monitor and adjust: Regularly review your progress toward your emergency fund goal. As you grow financially, adjust your contributions if needed. If you experience changes in income, expenses, or other financial circumstances, revisit your emergency fund target and adjust accordingly.
- Stay focused and disciplined: Maintain your commitment to building your emergency fund, even when tempted to divert the money to other uses. Remember that this fund is your financial safety net; it is not free money. Don’t get carried away and spend the money without a plan.
Conclusion
Life’s uncertainties are inevitable, but your financial stability doesn’t have to be affected. With an emergency fund, you’re a step toward securing your future and maintaining control over your financial journey. Start small, but start today. Every contribution to your emergency fund brings you closer to a more secure and confident financial future. Remember, it’s not just about the money – it’s about your peace of mind.