The ultimate guide to building your emergency fund

 

Martha looks great, eats well, lives a good life and is generally responsible with money. She has a monthly car payment and a few other debts she is trying to clean up from the past. She wants to get her finances in order and start investing. But just when she thought she was on track with her plan, she gets sick and needs an urgent operation. The medical aid won’t cover the full cost and she needs to fork out a N$7,000 top-up! Because she was so focused on getting out of debt, she only has N$4,000 in a 32 days account and she could make an urgent withdrawal, but it won’t be enough. She could also incur penalties on the urgent withdrawal. Her other options are a bank overdraft and asking a friend for a loan. What’s a girl to do?

Though the specifics may be different, most of us have found ourselves in situations that need money in this moment. One time I had nothing at all. There was also a time when a family member died over the long weekend (It’s the worst time to die.) and I could access my savings on a 2-3 working days notice. What Martha (and I) needed is an emergency fund. This is money that you put aside to use in times of crisis and unexpected situations (a burst tyre, losing your job, a sick family member, etc.). An emergency fund works as a financial buffer to protect you from using and depending on debt to cover emergencies. 

 

How much is sufficient for an emergency fund? 

Common advice is to set up an emergency fund that is equivalent to 3-6 months of your living expenses, depending on what you are comfortable with. For example, if you need a total of N$10,000 to cover your monthly living expenses, an emergency fund of 3 months’ equivalent is N$30,000.

TonG tip: If you would like to focus on debt, you could divide your emergency fund savings into manageable goals -i.e. save 1 month’s worth of living expenses first, finish paying debts and then get back to saving for the rest of your emergency fund. 

 

Type of account to use

An emergency fund is basically a savings account with funds that you are not really planning to use today, but still liquid and accessible because you could need it anytime.

For your emergency fund, you could use another bank account besides your everyday transaction account or a call account linked to your everyday account. You could also use a short-term money market account that will not kill you with penalties should you need the money short of the notice period. For a money market account, make sure to shop around for an account with an interest rate that at least beats inflation. 

TonG tip: You could divide your emergency fund and have 1 month’s worth of living expenses in a call account or other low interest savings account. You could then have the rest in a money market account with better interest. That way, you will have money accessible now should anything happen. You are also earning better interest on the rest of the money, which you can still access in a few days if you need it.  

 

Saving for your emergency fund

You know, you are human. It’s funny how we mostly only remember this fact after we’ve made a mistake – ‘I’m only human.’

– Girl, we know. Lol. 

It’s always best practice to remove your humanly weaknesses from the equation when saving for a goal. Automate your savings towards an emergency fund.

 

Spending your emergency fund

When I started saving for an emergency fund, I saw everything as an emergency. I once bought a wig because it was on sale and I wanted, no I ‘needed’ it. So I called it an emergency. If you don’t define your emergencies, you will keep ‘saving’ and still be found broke when the real emergencies hit. 

An emergency fund requires you to be disciplined enough to save up for it. You also need discipline to define your emergencies, so that if a pair of shoes that you really ‘need’ right now does not qualify to be funded by your emergency fund, it won’t be. It’s all about that discipline.

What have you determined are your emergencies?