What comes to your mind when you think of Emergency Fund? The first time I heard of it, I thought a backup fund or somewhere I can run to for shelter.
Emergency Fund literally means its name – where to go to for safety in time of trouble. Many people have an emergency “person/facility” they run to when they are in trouble – physically, health, education, emotionally, etc. It could be a trusted friend, parents, a partner, your favorite health practitioner, or even your siblings. The option varies from individual to individual.
The truth is, even though it’s comforting to have someone to run to, when it comes to finances, there is no guarantee that your emergency contact will have it. Not because they do not necessarily want to give you, but for the mere reason that they might not be in a financial situation to help you at that point.
There are 2 things you do not completely outsource
It’s too risky to hand over all that responsibility to someone else, and that is where an emergency fund comes in handy.
Another reason why an emergency fund is crucial is that it is expensive to get an alternative source elsewhere on the spot. Credit institutions – microfinance and commercial – come at a cost that would be avoidable if you were building your own little emergency nest.
So how do I build an emergency fund?
An emergency fund is typically between 3 to 6 months savings of the equivalent of your income. Low-income earners tend to spend more of their income on living expense. They might require more than 3 months’ worth of income. But that’s a tricky situation; if a bulk of the income goes towards living expense, how can they then save 6 months worth of income.
Think of it as a long-term plan.
If we save 25% of your income monthly, it’s equivalent to 3 months’ worth after just 1 year. Can you imagine how quickly it grows?
Mutual Fund, TBills and equities are very liquid assets, meaning they can be quickly converted to cash. These are assets to invest in when looking to build your emergency fund.
Also, when building towards an emergency fund, you can also invest as you aim to achieve your objective. The trick is to invest in assets that you’d be able to quickly convert into cash if the unforeseeable happens.
Emergencies are a part of life. It’s important that one is not left stranded and at the mercy of people. Start that emergency fund today.
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