How to Build an Emergency Fund from Zero Balance
Every once in a while life hits you with problems, some personal and others general. Most times, it is easier to scale through these problems if you have a well thought out plan to handle unforeseen circumstances, especially when it comes to money.
An emergency fund is basically money you put aside in case any unexpected and/or unpleasant situation comes up to put a strain on your finances. Therefore, it should be built consistently over time and only tapped into in cases that can actually be termed ‘emergencies’ such as accidents, robbery, job loss, natural disasters, pandemics or other health issues.
Why you need an Emergency Fund
1. It is meant to provide a soft landing for you during any financial crisis that requires more than your average income and budget can cover.
2. It gives you peace of mind and helps you stay calm regardless of whatever crisis may be ongoing.
3. It will also prevent you from tapping into your regular savings or investments originally intended for something else entirely.
4. It helps you avoid borrowing money and incurring debt in the middle of a crisis.
How much money should be in your Emergency Fund
There is no one size fits all hack to this but it is a generally accepted rule of thumb to have three to six months worth of living expenses put aside in your emergency fund. This differs across individuals depending on each person’s responsibility, income level, job stability and standard of living.
If your living expenses for a month add up to N100,000, then you need about N300,000 to N600,000 in your emergency fund. To save N300,000 in 1 year, you need to put aside N25000 monthly and to save N600,000 in a year, you need to put aside N50,000 monthly.
Building your Emergency Fund
For you to start saving money as an emergency fund, you need to calculate how much your monthly living expenses add up to based on the descriptions above and then break it down into small parts that can be built up in a year or two.
It is always a good idea to make this savings automated so that you don’t forget to put money aside. A good way to do this is with the Pettysave Autosave or Target save feature. They both allow you to save a fixed amount from your bank account either daily, weekly or monthly and earn up to 10% interest on your savings per year. This also helps you build financial discipline. It’s an emergency fund for a reason, it shouldn’t be touched unless there’s an emergency. That way, it will actually serve its purpose.
Quick tip: Make sure your emergency fund is different from your regular savings. Never mix them up.
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Oyin from Pettysave