The Coronavirus Pandemic continues to threaten economic growth, business continuity and the livelihood of individuals across the globe. The pandemic has exposed the fact that most of us live from hand to mouth with nothing or very little to fall back on when an unexpected event happens.The situation calls for each individual to review his or her financial plan and employ strategies to survive this season and thrive afterwards. In our various engagements, reference has been made to the concept of an Emergency fund as a viable option to make up for income short falls. In addition to reviewing your budget, an emergency fund could be a vital part of your COVID-19 response strategy, assuming you already have one.
An emergency fund is simply money or highly liquid assets you have set aside to cushion you against life’s unexpected events such as the loss of a job, medical emergencies, a major repair to home or car. Having an emergency fund should be a key part of an individual’s financial plan. It ensures financial stability and peace of mind during turbulent times. An emergency fund also safeguards future security by helping avoid tapping into your long term investment (e.g. retirement fund) to address emergency needs. Here are 5 tips to help you build your emergency fund during and after the COVID-19 pandemic;
I. Stick to Your Budget: Make a budget and live by it. As discussed in an earlier article, list all your monthly income, discretionary and non-discretionary expenses. Cut out or reduce unnecessary expenses to make room for savings. This will also help you determine your monthly living expenses.
II. Assess your need: Determine how much you need to save in your emergency fund. The general rule for building an emergency fund is to set aside 3 to 6 months of your living expenses. However, the ideal amount is dependent on your personal circumstances .i.e. job security, number of household income, nature of employment, income stability, medical condition etc. If you are more likely to have emergencies, you may need to set aside more than 6 months of your living expenses. For an individual who is less susceptible, 3 months or less may be fine.
III. Set a periodic savings goal: Based on your level of need, plan to save a specific amount of your weekly/monthly/quarterly income towards your emergency fund. However, if your income is irregular, try to set aside as much as you can as soon as possible. Regardless of the regularity of your income, saving should be carried out with the total amount needed in mind.
IV. Automate your savings: Set up a savings account or money market mutual fund account. The account should be easily accessible at no cost and should be separate from a bank account you use daily (e.g. Current account) so you are not tempted to dip into your reserves. Automate your savings into your emergency fund account using standing orders or direct debits. You may speed up your savings by saving windfalls, 'left-overs' and proceeds from selling something you do not need.
V. Review your plan: Financial planning is an ongoing process. It is important to review your progress towards building your emergency fund regularly and adjust if necessary e.g. if your circumstances or living expenses change (marriage, childbirth etc.)
Building an emergency fund is one of the first steps towards achieving financial peace of mind. Whether you are able to do so immediately or after the pandemic is over, adding an emergency fund to the list of your financial goals is a must. It is important not to save above what you will need at the detriment of achieving other financial goals. Once you are able to build your emergency fund to the level you need, channel your savings towards other financial goals such as achieving a dignified retirement.