Many people, myself included, have learnt the hard way about the importance of an emergency fund. I was talking to a friend of mine who had asked me to help her with her finances last week. She had all these lofty plans and investment ideas and was toying around with various types of investments including land. However the one thing she had not thought of was her emergency fund. Long-term investments are important but we do need money that can be readily accessible to us if something happened. We may have long-term goals we are working towards, but if we do not prepare to some level for emergencies, they can actually take us ten steps backwards. These are several reasons to have an emergency fund. The most common one is loss of income, irrespective of where the income comes from. Most of us depend on the income we earn to meet our living expenses and sustain our lifestyles. If you lose your job or income from your business today what would happen? If you are already thinking that your life would fall apart you need to put emergency money in place. People do lose or change jobs and businesses do go through some challenging cycles. Typically work towards having money set aside to cater for at least three to six months of your basic expenses. That should be a financial goal. If you don’t have any right now, you can start with that. So your emergency fund will not cover eating out at restaurants, entertainment or paying your monthly subscription to Cable TV. However an emergency fund enables you to pay rent/mortgage, buy food, pay school fees and cater for your basic bills. An emergency fund would also incorporate any standard monthly loan repayments you have to make. Even if you don’t have an income you are still obligated to service your loans. It would be good to have several months where you know that your basic living expenses are met even without you having to sell other assets like land or liquidate the pension fund that is positioned for a more longer-term benefit. I would also tell anyone thinking of leaving a job at some point and starting a business to have this in place. Contrary to what you may think and no matter how good your idea is, it will probably take time to pick up. Put this in place so that you can survive even as you give your business time to grow. Even if you are already running a business, you may go through seasons of low or no income. The business itself may need an emergency fund to cater for its ongoing expenses and you personally will also need an emergency fund for your personal expenses.
Apart from loss of income, there could just be sudden disasters that we cannot predict. However since we all know people go through some form of “sudden disasters” in their lives, the fact that at some point a ‘sudden disaster’ may happen is not a surprise. You just may not be able to predict what will happen. The roof of your house may collapse and you need to fix it. You could be involved in an accident and may need to repair yours or someone else’s car. Your child may drop a TV in a shop and break it and you are made to pay for it. There could be urgent medical expenses that need to be catered for by you or somebody close to you. Your phone could be stolen. Even if you have all the land in the world, it will not help you at this precise time because you need money not in a month, but NOW. Also you really don’t want to be in a situation where you are forced to dispose these kinds of assets because you will probably sell at a low price to get money quickly. Part of your emergency planning for some of these situations could be through insurance. Insurance is all about protection so do think of the areas in your own life that you will need protection. For some situations rather than putting aside money, it makes more sense to just get the insurance. You could put aside Kshs 300, 000 for a medical emergency but when it does happen the costs are one million shillings. Remember though, sudden disaster is not that you saw a new car that you suddenly want to have or you have just decided your living room needs a makeover. Plan to save for these things if you want them but they are not emergencies. They are definite benefits to having emergency money in place. Firstly you will stop or prevent the cycle of taking accumulating debt because of emergencies. These kinds of loans just create more problems. There is also some peace of mind knowing that in your worst-case scenario you can survive for a couple of months without that job or income. I have met people who were in fact able to take certain risks because they knew they had that cover. Some have taken sabbaticals just to re-evaluate what they want to do. Others have been more confident about starting business because they know the basics are in place. Just like an emergency fund can help you with sudden disaster, it can also help with sudden opportunity. If there is a fantastic investment that you whole-heartedly believe in, you can actually decide to use this money and then immediately work on building back your emergency fund. Remember there could be other situations that I may not have mentioned here. You may have personal situations that you need to plan for. Whichever way you do plan, I have learnt better safe than sorry.