Picture this. You have just lost your primary source of income with no prospects in sight, your child is in hospital needing an expensive life-saving procedure or you’ve just lost your investment money in a deal gone wrong.
All this has happened when you do not have an emergency fund. What would you do to get yourself out of the clearly tough situation?
These are real financial emergencies that could happen to you. And one sure thing about emergencies is that you can neither predict nor control them.
These events can really derail you from financial goals if not irreparably damage your future financial prospects. The best safeguard against the possibility of the worst happening is having a well funded emergency fund.
But if you do not have one, you still have to find a way out. Below, we discuss a few tips to consider.
When emergencies happen, they catch you off-guard. At that moment, you have no option but to prioritise the money you have towards that unforeseen occurrence.
Depending on how long the ‘emergency situation’ will persist, it may be time to rearrange your budget.
For example, if you have lost your primary income stream but still have some money coming in say from a side hustle, you may need to urgently create an ‘emergency budget’ where expenses are kept to the minimum and expenditure on ‘wants’ postponed until a future date when you can afford them.
You may also be ultimately forced to either liquidate an asset or raid your investment savings. Since you do not expect the emergency to last indefinitely, a lean budget can help you to preserve the funds you are tapping into.
If the emergency is of an incredibly high urgency nature such as paying for an urgent life-saving procedure or emergency travel to avert a family crisis etc., then a realigned budget will not be the immediate action to take.
Once you have used other avenues to raise money quickly - especially the borrowing route - you may need to come back to creating a lean budget to help you repay what you have borrowed as soon as possible and get back on track with your financial goals.
Yes, this definitely doesn’t look like a great option. But when you do not have an emergency fund, the possibility of getting into debt is always high.
An emergency loan doesn’t have to be a costly option if you choose the right option. It also doesn’t have to be specifically marketed by a lender as an ‘emergency loan’ because it may have some additional costs as compared to a ‘normal loan’.
The idea is to get a loan that has the best terms possible and the longest tenure possible - you don’t want a loan that needs to be cleared in a very short time to pay for your child’s emergency operation when you don’t even know how much more will be needed before he is discharged.
Typically, one should take loans to finance projects that lead to income generation such as opening a new business, purchasing an appreciating asset like land, getting into an investment and so on. So when you take a loan to pay for an emergency, you want the very best rates - but time will never be on your side in an emergency so you may not have the luxury of shopping or even negotiation.
In the context of an emergency, favourable terms means low interest and enough time to get you to pay it off comfortably without straining yourself financially.
Loans from shylocks are the most strenuous. The repayment period is short, and the interest rate is high, in the upwards of 25%.
Digital loans typically require repayment within a month and have some of the highest interest rates in the market.
Saccos have some of the most favourable loan terms, typically 1% per month but you have to remember that they may be a bit slower to disburse if you need guarantors to sign off.
Banks and deposit-taking saccos will have specially designed emergency loans that you can borrow with typically quick disbursement periods but eligibility requirements may be restrictive (e.g. for formally employed people, so if you have lost your job you may not qualify) and could have short repayment periods.
Microfinance institutions are also a good option especially if you have an asset to offer as collateral such as a motor vehicle, title deed or machinery. Their interest rates may be higher than banks and Saccos.
Top Tip: If you do not have an emergency fund, you want to be in good CRB standing at all times. If you have been blacklisted and need to take a loan to cover an emergency, it may be a tall order. You will typically be restricted to lenders who do not do CRB checks but instead charge huge significantly higher interest rates to account for that risk. To get a loan from a traditional lender, you will typically need to first pay the loan owed if you are blacklisted.
Read Also: Why are So Many Kenyans Taking Logbook Loans?
When you are pushed to a corner and have nothing else you can do, ask for help. This means reaching out to friends and family or colleagues for donations or soft loans that you can repay with flexibility.
Reach out, talk to your dependable peers or family and explain your situation. If they feel unable, they might broadcast to their networks to see if they can contribute enough to your emergency.
Note that you cannot really depend on this route since your friends and family may nor always be in a position to help - or even when they are, they may not be always willing to.
There’s one more practical form of help you can explore - a salary advance from your employer. Not all employers allow their employees to ask for payment in advance but it may not hurt to try and get this kind of assistance.
An employee salary advance differs from a salary advance loan in that you are relying on the benevolence of your employer rather than getting a short-term loan with interest from a lender with a memorandum of understanding with your employer.
This may not be an option for employees in the public service since you cannot have an informal arrangement with the institution.
Some employers explicitly close the door to this type of assistance in the contract given the complexity introduced by lending to an employee.
It will never hurt to explore this option especially in the extenuating circumstances of a personal emergency.
What is worse than having an emergency, needing money yet you cannot borrow because you have an existing loan you have not finished servicing.
If you just lost your job, it is very important that you make sure you do not further even lose your car, land, shares etc. if you had put them up as collateral for an existing loan because you suddenly are not able to make your repayments as negotiated.
It is time to visit your lender, inform them of your new financial situation and negotiate for a more flexible repayment schedule to ensure your already precarious situation is not exacerbated by the possible loss of your assets in the event of an auction.
If it is a medical emergency or any event that may require an immediate cash injection that would be best served by a loan, but you already have an existing loan, you can go the debt refinancing route.
This is the replacement of an existing debt with another debt typically with more favourable terms - while people will do this to simply get better terms, you can refinance to get more money which you can then use to settle your emergency.
Think of it as getting someone to buy the balance on the debt you have while giving you an additional amount.
For example, if you had an existing Ksh200,000 loan that now has a Ksh100k balance - which means you have to clear the 100K balance at lender A to get another loan - you can get Lender B, or even Lender A itself to give you an additional Ksh100,000 loan immediately to sort that medical bill, raising your loan back to Ksh200,000 without ever needing to pay the initial Ksh100,000 from your pocket.
Some informally call this a ‘top-up’ loan.
This is similar to the ‘do the best with what you have’ way of thinking. You have an emergency and while you did not have the foresight to create a fund specifically for this kind of thing, it is possible you have some money somewhere or something that can easily be converted into money.
If you need money urgently to avert a crisis, you may need to sell something of equivalent value if you have no hard cash, say in a general savings account and you cannot access a loan entirely or fast enough.
If you have lost a considerable amount of money in an investment gone wrong, your quality of life will take a hit until you can either actually recover the money lost (if you were scammed) or get back into a solid financial situation.
This is when you should think of places where you have money lying. It may be the time you remember all those guys you lent money to and never bothered to collect. Have you made some prepayments somewhere that you can opt out?
For example, If you had already paid for an event or a trip, you could cancel and try to see if you can recoup the money you paid for the service in advance. Had you just given a downpayment for a car? See if it is possible to get a refund.
Take some time to wrack your brains on what you can do to raise money from what you have.
Keep in mind that it is possible to make rush decisions that lose you even more money e.g. is selling your car at a throwaway really the best move? How about getting a logbook loan instead.
Read Also: What to Do When You Don’t Make Enough Money
If things get hard and numbers are not crunching, you could seek help from a financial advisor if you can afford one.
Financial advisors will give you pointers on what to do, when and how. It is usually in their interest that you do well because it means continuity for their business.
Do not shy away from seeking professional advice. It could be what makes or breaks your emergency recovery prospects.
Read Also: Why You Might Need a Financial Advisor
Emergencies are not desirable, but they come uninvited anyway. The best thing for you to do is to get an emergency fund.
Save when you can, look for more income, and pay your debts as fast as possible. The best thing you can do for yourself is to be prepared.
Set a target and start contributing. Slowly but surely, you will get there.
Want to learn more about how to arrive at the correct figure to work towards as you start building your emergency fund, see>> How Much Emergency Money Should a Family Have In 2022