Personal Finance: Why you need to set up an Emergency Fund

3 easy steps to setting up your personal emergency fund

3-step guide to building your personal emergency fund (Photo: Tomorrow Makers')

When the year begins, most people make resolutions centred around personal finances and seeking to attain financial independence.

A highly recommended practice especially in 2021, just after the 2020 Covid-19 crisis which wreaked havoc on many people's financial health.

A famous quote by American Inventor Thomas Edison goes: "Opportunity is missed by most people because it is dressed in overalls and looks like work." 2021 presents an opportunity to get back to financial health and you may miss it if you are afraid to put in the time and effort.

The first rule to handling finances is discipline and hard work, it's not going to be easy but it's going to be worth it!

Emergency Fund

A personal emergency fund in simple terms is a kitty you set up in case your primary source of income fails or some other unexpected occurrence hinders you from sustaining your budget for example, job loss.

Pulse Live spoke with author and financial expert Rina Hicks on a simple guide to setting up a personal emergency fund.

"We often make the mistake of not planning for emergencies because ‘it wont happen to me’, ‘things will sort themselves out somehow’, or ‘I’ll have a fundraiser, so my friends and relatives can come to the rescue’. Some people use their credit cards as their emergency funds. These are not dependable ways of taking care of an emergency," Rina advises.

There are three key steps one needs to take while establishing an emergency fund and they are as follows:-

  • Calculate your monthly living expenses

The first step is to determine the exact cost of your monthly expenses. These may include rent, utilities, transportation/car insurance, food, entertainment, grooming, subscriptions and any other bills you take care of.

Give these an exact figure because it will be important in calculating how much should be in your emergency fund.

  • Consider special circumstances around your income generator

You should also consider special circumstances around your primary source of income. Rina advises that in case you're in a profession which may be highly specialized, you may have to consider that getting another job will take a longer time, therefore, you may have to rely on your emergency fund for a longer period of time.

"Your emergency fund should be at least three to six months of your living expenses. The size of your fund will depend on your expenses as well as your circumstances. For example, if you are employed in a very unique and specialized role and are laid off, it could take a long time, maybe even a year or more, to get another job. In that case, your emergency fund should cover you for at least eight months to a year," she recommends.

  • Open an account

After you have determined the exact amount of money you will need in your emergency fund, the next step will be setting up an account and making deposits into it.

Ms Hicks told Pulse Live that the best kind of account would be either a savings account or a money market fund.

"Begin by setting aside a portion of your monthly savings for your emergency fund. Before you invest your money in any long-term opportunities, especially in these uncertain times, you need to ensure that you have your emergency fund in place. It would be best to save this money in a savings account, or a money market fund, not in a current account. Save in low risk, highly liquid assets. As your fund grows, negotiate interest rates with the asset management companies and banks where you keep your money," she explained.

You are now ready to kick off the year with a personal emergency fund which may come in handy later on, better safe than sorry!

  • Rina Hicks is the author of the book Money-Wise: Create, Grow & Preserve Wealth (2016) Integrity Publishers, U.S.A. She is is a Corporate Finance Analyst and Director at Faida Investment Bank. She holds an MBA degree from Strathmore Business School, a Bachelor of Business Degree majoring in Finance and Marketing from Edith Cowan University, Perth, Australia.

JOIN OUR PULSE COMMUNITY!

Eyewitness? Submit your stories now via social or:

Email: news@pulselive.co.ke