HOW TO BUILD AN EMERGENCY FUND IN A YEAR

By Kelvin Mkwawa, MBA - Seasoned Banker.

The last two weeks, I shared some tips on how to develop a savings culture through my articles named “How to save money while in College” and “How to save for your retirement”. The purpose of doing that is to encourage you to start developing a savings culture which is critical for our financial well-being. Today’s article is on ‘emergency fund’ and is a continuation onstressing the importance of savings in our society and for our own personal development. An emergency fund is money that you have saved to help you cover unexpected costs that come with everyday life. It’s understandable that to set up an emergency fund when you are living salary-to-salary is a hassle; you need extra savings to protect you in case of emergency but you don’t make enough money to create that cushion. No wonder many people are struggling to create the emergency fund. But it is possible to build your emergency fund from zero even if you are living on a month-to-month salary. The size of an emergency fund is dependent on your current financial situation and also will probably change as your financial situation does, so it’s important to revisit your budget and make sure you’re covered. So how much should you save for an emergency fund? A general rule of thumb states that an emergency fund should cover at least six months of your expenses.

In order to ensure that your emergency fund is used properly, you need to be able to identify a true emergency. A true emergency is a situation that requires your immediate attention and action, and that can affect your long-term well-being or impact the viability of an important asset (such as your home). Also, it is vital to realize that an emergency fund isn’t a fund for large entertainment and leisure purposes; for example, a vacation trip to Serengeti does not qualify as an emergency. Building an emergency fund is different for everyone. How you approach the saving process, how much you save, and where you put the money dependson your own circumstances. The most important part is that you do indeed save for emergency expenses. Since an emergency fund is designed to cover an unexpected emergency, it needs to be placed in a place that is reliable and you can access immediately when you need it. It is advised that an emergency fund should be placed in any type of savings account and not in money market accounts. In this article, I will share a few tips that will help you build your emergency fund fast so that you are prepared before the next disaster hits.

• Sell Unnecessary Stuff – Everyone owns some things that may be of less importance but we still keep them; sell them. You truly don’t need 20 pairs of shoes, 3 TV sets at your house or closets and closets of clothes. You should start looking at your stuff as an emergency has already occurred and see which stuff you truly don’t need and which items are important for your well-being. Those that you truly don’t need, start looking to sell them slowly and set a goal of selling at least one item per week and depositing the money into your emergency fund account. This exercise will help you reduce the clutter in your house while helping your emergency fund to grow quickly.

• Spending Ban – A spending ban can help you grow your emergency fund really quick. You can set your spending ban anywhere from one week to a year wherein you refrain yourself from all spending other than for necessities. Putting a spending ban, helps you free up money in your budget to put into your emergency fund without otherwise affecting your bottom line. The spending ban will only work by first identifying which are your absolute necessities which can include; utilities (electricity bill, water bill), food, healthcare, rent, mortgage/any bank’s obligation, and gas. After that, for the period of the spending ban that you set, you will live without anything above and beyond those necessities. Spending bans have no limit so you can have more than one and at the end of every spending ban, your extra money that you save can go into your emergency fund.

• Create Multiple Income Streams – Another way of building your emergency fund faster is by finding a way to make a little extra income on the side. One great way to make additional income is by getting a second job (for full-time employees). For non-employees, options can be an Uber / taxify driver, or if you have skills that can be marketed, consider launching a part-time business that can earn you extra income. By having multiple income streams, you can afford to stash more money into your emergency fund without starving yourself.

To summarize, how you approach the saving process, how much you save, and where you put the money dependson your own financial circumstances. But the most important part is that you do indeed need to have an emergency fund for unexpected expenses. Furthermore, it is important to note that the best place to put your emergency fund is through a saving account. An emergency fund can mean a difference between financial failure and financial success and it will help you reduce your dependence on borrowing money whenever you have an emergency. Having an emergency fund is a necessary block for establishing long-termfinancial stability. Anyone can do it; try to use the tips that I have shared these last two weeks and you will be on the right track financially.

Written by Kelvin Mkwawa, MBA
Seasoned Banker
Email address: Kelvin.e.mkwawa@gmail.com