The first time I learnt about something called an emergency fund was when my brother broke his wrist. It was on a Saturday at around 9 O’clock just in time for the evening news, my dad’s phone rang. So he picked the phone and excused himself. He took long before coming back. It was after 30 minutes that he came back and said, “Ian, your brother has broken his wrist. His teacher just called and said he can’t go back to school because it is really bad. So he’ll stay in hospital for the night then tomorrow they’ll take him for an operation to fix him.”
From his tone, I could tell he was so relaxed but my sister seemed a little concerned. I couldn’t tell if she was concerned about my brothers wrist or the hospital bill. It was only after my father mentioned that the hospital bill will be covered by the school that I could tell what was really disturbing my sister’s mind between the wrist and the bill. Because only then did she seem to be relaxed. On sunday they said it was all well but my brother had to stay in hospital for another 4 days as they monitored his hand. On Wednesday, the school called and said that they only cover the medical bills upto a certain amount. As things stood my brother had used more than what the school could cover so the extra amount was to be covered by my parents. For me I thought that was going to be a lot of money but then my dad was so relaxed. So my sister who was concerned about the hospital bill from the time she had the news asked him where the extra cash was going to come from given that the wrist issue was never planned. His answer was simple, “Save for the good, save for the bad. “
That was something I had never had of because I was expecting an answer like taking a loan or maybe asking for donation. So I gave my dad’s answer some thought that was when I realised that people should plan for the bad things that can happen in their life. His answer was shouting two words and that is EMERGENCY FUND. I later came to learn about an emergency fund which is in simple terms money set aside for life unexpected events. Like my dad had put it, saving for the bad.
Why do you need an emergency fund?
If not the best feeling then it is a good feeling to know that you can handle anything unexpected that comes your way without having to dig into your savings account or going for loans to be able to manage the situation. Being prepared for the unexpected gives you the confidence to do whatever you plan to do in your financial life. So the first thing an emergency fund does is that it gives you a relaxed mind. Just like my dad’s case. A relaxed mind in return gives you courage to pursue whatever you want in your financial life.
The second thing an emergency fund does is that it helps you cover unexpected medical expenses. You never know when you or somebody dear to you will fall sick or when an accident will happen unless you are a prophet. So that is why you need to prepare for the worse. It may be something wrong but you need to think like somebody you love can fall sick any time. For you to be able to manage this without any pressure you need the fund.
Besides that, emergency fund helps you cover unexpected travel expenses, car and home repairs you didn’t plan for.
Have you ever thought of where you will get the funds for survival in case you lost your job today? What should you do after you are fired? How will you cover your living expenses in case you are fired? If you are not sure how then it is time to for you to start saving for the worst. These are what emergency funds are meant.
So now that you know how important an emergency fund is then it is time go about the business of setting it aside. How do you do it?
1. Cutting on costs
You need to sit down and look at your budget and know where your money is going and how much you got coming in. What are you spending most of your cash on? And how much are you spending to be specific?
The first step in doing this is to review your expenses. You can do this by writing down all your expenses then checking out for unnecessary expenses in the list. Cut on those recurring costs and then look out for things you are spending most your money on and then see if you can regulate.
If that is not enough you can consider options like;
- Moving to a cheaper house
- Sharing a ride to work with a friend or using public transport which is cheaper compared to private. You can also consider other options like cycling to work or walking if it is not far away.
- Buying cheaper clothes and shoes
- Taking your own food to work instead of eating in restaurants
- Making your own coffee instead of takeaway ones
- Reviewing your insurance to make sure you are getting a deal you can afford
- Subscribing to a cheaper cell phone plan
- Cut on energy by using energy saving bulbs and turning of any appliances you are not using
- Avoid impulse spending
These are just a few options you can consider but there are a lot more options to make sure you cut on your expenses. The money you get from this you should put it in your emergency fund.
2. Make a budget and stick to it
Most people often find budgetting a hard task and often they can’t get themselves to sit down and do a budget. But if you want to set aside an emergency fund then you have to do it here no otherwise. But if you can’t get yourself to sit down and do a budget then you can click on the link below for help ⬇⬇⬇
So how can you make a simple budget that you can stick to?
- Set financial goals : What do you hope to achieve in making this budget? The answer here is simple because your goal is to set aside an emergency fund.
- Identify how much you have coming in. In simple terms you need to identify how much your income is.
- Identify where you want your money to go to. Which is to say, write down your expenses. How much do you plan to spend on food, water, energy, shopping, insurance, transport, housing blah blah blah. Write down everything you think you are going to spend your income on in that particular month plus the amount of money.
- Work out the difference between your income and expenses. If what you are planning to spend your money on is less than your income then you can put that extra money on your emergency fund but if there is a way you can reduce your expenses some more then do it. Because that would mean more money to your fund. If your expenses is more than your income then you need to increase your income or reduce your expenses some more. Word here is that you need to live below your means.
- Monitor your progress. You need to know how you are doing with your budget from time to time hence the need to know where you are at different times. This will help you know whether you are following your budget or not and make necessary adjustments if need be.
You can also automatically channel some cash towards your emergency fund if you find doing that manually is difficult. Here a fixed amount of funds is deposited automatically at specified intervals to your emergency fund. When you receive a paycheck from your employer, the amount you set is automatically transferred to your emergency fund. This for me is the best strategy because any temptations of you using the money for other purposes is eliminated. Some of the reasons you need to automatically save to your emergency fund are;
- It is safe
- It eliminates procrastinating
- It boosts your savings
- It also manages your spending habits.
4. Manage your debt situation
To be able to finance your emergency fund you need to manage your debt situation first. Or else you will find your money going to repaying your debt instead of your emergency fund. So how can manage your debt situation?
- Know who you owe and how much you owe them. If they are many then you need to make a list. Awareness is key first. Knowing who you are fighting is key before you fight any battle.
- Budget. This is to make sure you channel most cash towards your debt payment.
- Pay your bills on time.
- Pay the minimum. If you think you are not going to pay anything towards your debt then make the minimum payment.
- Decide which debts to pay first. You need to prioritize. The best way to do this is by paying those debts with high interest rates first.
- If you are struggling put a hand out. People can help.
- Know your debt to income ratio. Know what your income is and how much you are using to repay your debt. This will help you to determine if your debt will bar you from borrowing in the near future.
- Monitor your debt repayment. This will help you know whether or not you are making progress.
5. Increase income
If you cannot cut on costs, you cannot save or you find it difficult to manage your debt situation but you still want to have an emergency fund then the only option you have remaining is to increase your income. The increase you realise should be used for emergency funding. There are so many ways of increasing your income and it is up to you to determine which one suits you well. Some ways in which you can do this include ;
- Driving for Uber or Lyft
- Managing social media accounts
- Selling your pictures
- Answering survey questions
- Renting out your car if you have one
- Interior decorating
- Tutoring online
- Walking dogs
- Starting a blog
- Teaching a language online like teaching English to chinese students
- Becoming an affiliate marketer
- Food delivery
- Creating YouTube tutorials
- Teaching driving lessons
- Starting a side hustle ➡Learn how to start a successful side hustle