An emergency fund is money stashed away to help you in times of financial distress. It is a safety net you use to meet unanticipated expenses, such as an illness, major home, and car repairs, or even unemployment.
Having an emergency fund gives you a better shot at weathering a crisis without making you fall into debt to pay for your emergency.
Making hay while the sun shines!
Peter is a millennial in his late 20's who had an emergency fund set up before the COVID- 19 pandemic.
He works as a human resource assistant at a bank in Nairobi, the job doesn't pay much but enough for him to pay rent, pay off his HELB loan monthly, save and support his parents back at home.
He learned about saving for an emergency from a financial literacy session while in campus and since then he started saving monthly for his emergency fund.
When the pandemic hit last year, and he got a pay cut, he wasn't worried about his immediate expenses because he had saved up enough to sustain him for that period.
So, how can you become wise like Peter and save up for an emergency fund?
I know what you are thinking, where do I start, how much do I save, where do I put it? Don't worry we will answer your questions and more in this article so make sure to read till the end.
1. Where do I start to create an emergency fund?
Firstly, an emergency fund should be part of your financial goals.
As you budget your money, where to invest, or how much to pay your debt. Set aside a portion of your income monthly to your emergency fund account.
2. How much do I save?
The best size for an emergency fund depends on a number of factors, including your financial situation, expenses, lifestyle, and debts.
We recommend that you should save enough to cover anywhere between three to six months’ worth of expenses, which can help you weather a financial emergency.
For instance, what Peter the wise did. He first determined his expenses in a month on his essentials like food, rent, healthcare and divide that by 3. For instance, Peter spends Ksh 30,000 multiplied by 3 its Ksh 90,000 emergency fund. He saved an average of Ksh 5000 per month for his emergency fund.
Make the savings regular eg: on a monthly basis, which will help you be consistent and achieve your goal.
3. Where do I save it?
Since emergencies happen at any time, you should save your money in a safe liquid option so that your money is easily accessible in time of need.
It is a great place to start to save for your emergency fund to cushion you from life's uncertainties.
View your emergency fund as an insurance policy. Once you have it, guard it carefully. It’s not a piggy bank or for incidental expenses.
In fact, as your salary rises, be sure to up the amount to match your new situation.
Use the fund only in the event of an emergency and spend it carefully.
Remember, once that money is spent, it always takes much longer than anticipated to replace it. Start now and save whatever you can, even if it's only Ksh 100!