Emergency Funds
An emergency fund is at its core, a stash of cash for the rainy day.
I feel like before I get into what an emergency fund is and what constitutes Financial emergencies, I need to applaud you guys for doing the thankless but oh so rewarding work of getting a grip on your personal finances.
So well done and congratulations on doing getting your house in order and getting really cozy with your numbers.
Initially, I was going to speak on Debt which is the final component of the expense portion on the wealth formula we discussed in week one. The one about increasing the gap between what you earn and spend, and investing that gap. And wash rinse repeat. I even had the perfect song layout and everything, BUT THEN, something fantastic happened and I was like okay, this topic is important and for some reason feels urgent.
An emergency fund is at its core, a stash of cash for the rainy day. Keeping in theme with the sailing examples, it’s basically a lifeboat that you have available in the middle of a really bad storm when your ship hits the rocks, that takes you safely to shore. Where hopefully you find another ship that gets you back in the water.
When building emergency funds, everyone has their preferences surrounding certain aspects, such as how long it should take you to build it, in what currency you should store it, where you should store it etc, but today I’m going to suggest very adamantly the preferences that you should use when you get around to building your emergency fund ( hopefully ASAP).
Building an emergency fund is parallel to the already perfect budgetary system you have running, meaning it’s separate from it. It not going into your monthly expenses, It’s a target outside of the realistic money goals you have been setting and refining. And it certainly isn’t a loan pot for things that come up surprisingly.
In Personal Finance, emergency funds are for ONLY, ONLY, as in ONLY emergencies. And in this case, your ONLY emergency is the loss of your income source. i.e. loss of Job, shutting down a business, death of sugar daddy. You get the drift. The really really serious stuff. Your co-workers asoebi is not an emergency. Look corona is outside and who knows when the wedding will be?
Now, if you are wondering how to ascertain how much should be in your emergency fund, a good rule of thumb is three to six months of your monthly expenses stashed away in a very easy access account (by access I don’t mean ATM, I mean that it’s being kept in an account where withdrawing the funds in case of an emergency, doesn’t become a long thing) in the currency with which you settle your daily obligations.
I strongly suggest that you have a minimum of 6 months. Only you know what the amount is for you because (hopefully) you have been tracking and fine-tuning your monthly expenses, so you can comfortably multiple that number by 6. Whatever answer you get is how much you should be targeting to have in the Emergency Fund. So, for example, if all your actual monthly expenses and provisions come to N350,000, then your emergency fund should be N2,100,000. That’s it. (350,000 multiplied by 6).
I also very adamantly suggest, that you keep this money in a money market fund account, it is easily accessible, re the criteria two paragraphs above, and not in a savings account. For a myriad of reasons, but the most important is that the interest rates in Nigerian Savings accounts are abysmal. The likelihood that the cost of the text message the bank uses to notify you of the interest is greater than the value of the interest you’d have earned, tells you all you need to know about how I feel about putting your emergency fund in a local savings account.
If you do not want to use Mutual funds, please look intoPiggyVest or CowryWise - they seem to have various saving plans that have easy withdrawals.
Whatever you do, please do not put it in the bank.
Do not put it in an account that can go down in value, because you want the principal as secure as possible.
Do not put it in somewhere that you’ll be charged for taking it out.
Additionally, I know we are trying to buy and hold United States Dollars right now ( which is a great idea by the way with the wildly upwardly fluctuating exchange rate); however for your emergency fund, you need to consider how easily you’d be able to convert your dollars to Naira to access it when the need arises.
As much as we want to grow this money and be tempted to invest it, please don’t. This money is basically insurance to ensure your life can run as smoothly as possible for the next six months in the event that your major income source goes bust. This Emergency fund provides you with a breather so you can plan your next steps in getting back on track to earning income. This buffer will make the recalibration process soooo much easier knowing that you have a cushion and that you can afford to actually take your time in making the right next step.
Until next week, I leave you with the immortal words of P-Square
If I no get money, I get place to borrow.
*If you want a copy of my customised excel expense tracker please send an email to peers@peermentorcircles.comand you’ll be sent a copy along with instructions on how to use it.