Murphy’s Law states that if anything can go wrong, it will go wrong sooner or later. If you are not prepared for the unexpected challenges that life throws at you from time to time, you could find yourself in a really tight spot. This is why it is important to have an emergency fund at all times.
An emergency fund is a pool of liquid money set aside for unforeseen expenses like a medical expense or a loss of income resulting from being in between jobs. Having an emergency fund can be the difference between a small bump in your financial life and complete disaster in your entire life. It allows you to meet unexpected financial challenges and keeps you from getting into debt when you need a bit of extra cash.
You should only dip into your emergency fund for a real emergency; to keep yourself afloat between jobs or a medical expense. You cannot use your emergency fund for things like a vacation, a shopping spree or to upgrade your perfectly good cell phone or laptop. An emergency is not an expected expense, like buying Christmas presents that you didn’t budget for a few months ahead of time.
Ideally, your emergency fund should be 3-6 months of expenses. The number you use to calculate your three to six months would include expenses like rent, utilities etc. It does not have to include dinners out or entertainment. Even still, 3-6 months of basic expenses will still add up to hundreds of thousands of shillings for most of us so it can be daunting to save up that much. But you don’t have to accumulate it all at once. Set a reasonable time frame (say three years) to get to the six-month number. This can easily be achieved by putting away around 10% of your income every month.
Why is it important to have an emergency fund? Here are a few reasons.
To cover unexpected medical expenses
You can never know when you or anyone in your family will need medical care after falling ill, getting injured or getting into a car accident. When such unexpected mishaps happen, you will need money to cover medical expenses. Granted, a medical cover may sort out simple illnesses that require outpatient care, however, some complications and a few days in the ICU can easily max an inpatient medical cover. A well-funded emergency fund can help you deal with these costs and make it easier to get through these challenging times.
To cover your living expenses
What happens if you suddenly lose your source of income? Jobs can easily be lost. Businesses go down as well. If this happens, the money will stop flowing in and you will have to cover your day to day expenses (such as rent, utilities and food) using your savings until you can find another source of income. If you have an emergency fund, you can be sorted for a few months until you get back on your feet. Check out this article on How To Manage Finances When One Partner Loses Their Job
For self-employed people, there are times when business is low, or you have not been paid by your clients. During these times, you still have to pay your bills and an emergency fund can come in handy. 3 Kinds Of Income And Why You Should Have All Of Them
To pay for home repairs
Depending on the tenancy agreement, you may have to take care of damages that occur when you reside in a house. If you own the house, then the repair costs are solely on you. These repairs may include leakages, leaking roofs, damaged ceilings just to mention. While some minor repairs may not damage your finances, there are some damages that can be quite costly. Take for instance an unexpected fire that destroys much of the kitchen or other rooms in the house. We can also have damages from natural disasters such as floods and landslides. Having an emergency fund will help in taking care of these repairs comfortably without having to get into debt.
To pay for car repairs
Your car, just like your body, does not announce when it will break down. Things like car service are easy to plan as you can check on the mileage and some vehicles even alert you in advance. However, what happens when your engine knocks or you need to replace something like all four shock absorbers. If you have no money to repair or replace the defective parts, then you will either have to take out an expensive loan or learn to survive without your car. Ideally, though you should also have a fund separate from your emergency fund to take care of car repairs otherwise you may end up with no emergency fund if you have a big repair job.
To cover unexpected travel expenses
Some of us live far away from our parents or family. Think of a situation where your parents live hundreds of kilometres away and suddenly, one of them becomes seriously ill. Travelling to and fro by road will cost you over a thousand shillings if the distance is over 250 kilometres. Travelling by air is more expensive. Now imagine if you live in another country and you have to use tens of thousands in airfare. You will need to get some money fast so as to make the trip. An emergency fund can help in this regard.
To cover other unexpected emergencies
We live in a world where anything can go wrong at any time. The COVID19 pandemic is a good example. What happens if the Government had declared total lockdown for two weeks? You would probably have had to shop enough food for the two weeks. The after-effects of such pandemics such as job losses and shutting down of businesses are huge. To survive this, you would definitely need an emergency fund.
Pandemics are not the only emergencies though. Natural disasters such as major earthquakes or tsunamis could almost have similar after effects i.e. job losses and business closures. You could say the same about political unrest. During these times, an emergency fund can come in handy to help one be comfortable till things go back to normal.
Emergency funds are a priority in this life, and the sooner you have a fund, the better.
For you to have an emergency fund you need to have learnt the art of saving first. Check out these articles on Saving or investing, which way to go? and Personal Finance: How To Get yourself Organized. Be careful about where you get financial advice so that you don’t lose your money – Be Careful Where You Get Your Financial Information – There Is A Lot Of Fool’s Gold Out There Masquerading As The Real Thing
Also check out this article on Money Saving Tips to Survive A Loss Or Reduction of Income
If you are not sure where to start your emergency fund journey check out the articles below.
How to create a Financial Plan
7 Common Financial Mistakes & How To Avoid Them
Finances: 7 Reasons Why You Need To Manage Your Money
Finances: 8 Reasons Why You Need To Do A Lifestyle Audit On Yourself