Before the pandemic, many of us may have thought that a rainy day fund was just an extra expense we couldn’t afford. But as we’ve seen, the unexpected can happen at any time. Whether it’s a natural disaster, a medical emergency, or a job loss, having an emergency fund can provide a much-needed cushion.
If you’ve been looking to create an emergency fund with little success over the years, don’t worry. In this article, you'll discover 9 rules for an emergency fund that will set you on the path to financial security and peace of mind.
How much you aim to save in your emergency fund will depend on your individual financial situation. For instance, you can aim for a smaller emergency fund if you have a more stable job or income.
But if you have a less stable job or income, you may want to aim for a larger emergency fund to provide an extra financial cushion.
Aim to have enough money in your emergency fund to cover at least 3 to 6 months of your living expenses.
Whatever your target is, make your emergency fund goal specific. Consider the following two statements:
The second statement is specific and seems achievable. If you have a specific goal, you’ll have a more clear path to follow. Here’s an example of how you can set a specific emergency fund goal.
Let’s say you want to save a six-month emergency fund and you have a monthly budget of Ksh30,000 to cater for essentials such as rent, food, and transport. To reach your goal of a six-month emergency fund, you’ll need to save Ksh180, 000.
To make this goal specific, you could set a deadline of two years from now to reach this goal. That means you’ll need to save Ksh7,500 each month to reach your goal.
Budgeting is the best way to ensure you’re able to save for your future and stay on top of your finances. Creating a budget doesn't have to be complicated.
To start, take an inventory of all your income sources, (salary and investments) and expenses such as rent, food, and transport. Once you know your income and expenses, it will be easier to create a plan for how much should go toward your rainy day fund.
For example, if your monthly expenses add up to Ksh40,000 and you want to have a three-month emergency fund, you’ll need to save Ksh120,000.
After deciding on an amount to save, stick with the plan so that you reach your financial goals faster. Do it even if it means making sacrifices here and there along the way.
Read Also: The Ultimate Personal Budgeting Guide.
Make a plan to regularly contribute to your emergency fund. The more consistently you save, the faster your emergency fund will grow. Besides, a plan can help you stay motivated and dedicated when saving.
Here’s a plan to help you contribute consistently to your emergency fund.
Read Also: How to Boost Your Monthly Savings.
It's important to keep your emergency fund separate from your everyday checking and savings accounts so you're not tempted to use it for non-emergency expenses.
Some options for keeping your emergency fund in a separate account include:
That said, choose an account that allows your money to grow as much as possible through interest.
Read Also: Is a Bank Saving Account Good Enough For You?
So that you stay on track, consider setting up automatic transfers from your current account (the account where your deposit or other income is always deposited) to a high-yield savings account specifically for your emergency fund.
You won’t need to worry about manually transferring money every month. As such, you can avoid the temptation of using that money for other purposes, as it’s not easily accessible.
While it's important to keep your emergency fund separate from your everyday accounts, it should also be easily accessible in case of an emergency.
Consider opening an account that allows you to withdraw funds without penalty and without having to wait for a check to clear.
Besides, make sure you have multiple ways to access your emergency savings accounts, such as online banking, mobile banking, and a debit card. This will give you flexibility and ensure that you can access your money even if one method is unavailable.
A side hustle can be a perfect way to boost your income and build an emergency fund. Not only do they provide extra cash flow, but they also have the potential to become full-time careers.
With this additional income, you can save more and add it to your emergency fund without making drastic changes to your budget.
Here’s some good news. Most side hustles require minimal start-up costs.
For instance, if you have a skill or hobby that you can monetize like web design or tutoring, there’s no need for an expensive investment before getting started. All you need is to sign up on platforms offering such services or advertise your skills.
Your emergency funds should only be used for true emergencies and not for non-essential expenses.
If something costs more than you can comfortably afford now and there is no other option available, this could be a valid reason to dip into your emergency savings.
But if the expense isn’t a pressing need or would just make life more convenient in the short term, taking money out of your emergency fund may not be the best idea.
Here’s what to remember, when you use your emergency fund, make sure to replenish it as soon as possible so that you're ready for the next unexpected event.
Lastly, exhaust all other options before using your emergency funds. Ask yourself, ‘have I reached out to my friends for help?’ Can I negotiate for more time?
With markets fluctuating and the cost of living rising, it is essential to regularly review your emergency fund to remain prepared for whatever life throws your way.
Since you have an up-to-date understanding of where your money stands, you can face potential issues confidently.
Here’s how to review your emergency fund:
An emergency fund provides a cushion to fall back on in case of unexpected expenses or emergencies and can help you avoid high-interest debt. Keeping the rules we’ve discussed here in mind will help ensure you have enough to cover for any eventualities. So, when are you reviewing your emergency funds?