Do you worry about being financially prepared for unexpected expenses or events? Are you tired of feeling stressed and anxious about your family’s financial stability in the face of the unknown?
You’re not alone.
Many families struggle with how much they should be saving for emergencies.
Without a solid emergency fund, even a minor financial setback can mess up your budget. But fear not! In this article, you’ll discover everything you need to know about emergency funds including how much a family should save.
It is an amount of money set aside in case of an unexpected financial crisis. This reserve can help you survive calamities such as:
Having a backup plan gives you peace of mind and gets you ready for potential disasters.
That said, you shouldn’t confuse an emergency fund and a savings account. The only purpose of an emergency fund is to provide financial security during times of need.
With an emergency fund, you won’t have to keep borrowing from friends and become a laughing stock, dip into your savings or take out a loan when the worst happens.
You’ll have the resources to cover the costs.
Read Also: What’s an Emergency Fund and Why You Need One.
The money you need to set up an emergency fund depends on your unique circumstances. Experts recommend setting aside three to six months’ worth of your living expenses.
But as already said, the right amount depends on individual needs. Some things to keep in mind when determining the size of your emergency fund include:
There are a few different options for where to keep your emergency fund, and the best choice will depend on your individual needs and financial goals.
Here are a few options to consider:
An interest-earning savings account is a safe and easily accessible place to store emergency funds. Look for a high-yield savings account so that your emergency funds earn interest.
Money market funds invest in low-risk avenues and can be a good way to store your emergency funds while earning interest. The good news is that they process withdrawals with short notice and are regulated by the Capital Markets Authority (CMA).
Bonds offer higher interest than savings accounts and money market funds. When you buy a bond, you’re lending money to a government or corporation in exchange for interest payments and dividends. Bear in mind that bonds lock your savings for a certain duration. If you withdraw before maturity, you may incur losses.
You can also invest your emergency funds in stocks. However, this can be a risky venture because the stock market can be volatile and is subject to fluctuations. As such, diversify your portfolio, set stop losses, and regularly review your investments to limit losses.
SACCOs offer a range of products including a savings account that you can use to grow your emergency funds. They often offer competitive rates. However, there are also risks involved. Check the fees and terms associated with SACCO and its financial stability.
Achieving your emergency savings target can take time. Don't worry. Here are a few strategies to help you reach your goal.
A budget will help you know how much you need to save toward your emergency fund each month. To create a budget, list all your monthly expenses, income sources, and saving goals. Subtract your expenses from your income to determine how much to save each month. Knowing how much you spend each month could help you identify potential areas to cut back.
Look for ways to cut expenses and use the money you save to grow your emergency fund. It can be challenging at first, but once you make it a habit, you’ll save more money faster.
Start by making small changes like cutting down on entertainment expenses such as going out for drinks or movies. You can also cancel tv subscriptions or move to cheaper options.
Lastly, shop around before purchasing as you may find cheaper alternatives.
An extra source of income will boost your savings. You can increase your sources of income by:
Read Also: 6 Ways to Stay On Track With Your Saving Goals.
Only use your emergency funds to pay for true emergencies. Some examples of situations that may warrant the use of your emergency funds include:
In sum, it’s crucial to have an emergency fund to provide a cushion in case of unexpected expenses or loss of income.
The amount you should save depends on your income, expenses, debt, and the level of financial security you’re comfortable risking.
Lastly, only use your emergency fund for true emergencies and always include them in your budget.