Life has been good for Segun (aka Segsbobo), he got a job a few months ago at Chell, a well-known multinational manufacturing company. The pay is incredible (the one you don’t mention in polite company or “they” will call you proud and boastful), he is about to buy a nice 2 year old Toyota Camry(Chrome black) and can finally keep up with his friends when they go out.
It’s been almost a year since the new job, while things have been generally okay -Segun moved to Lekki 1(a nice highbrow area for young professionals in Lagos) in February 2015- he has heard whispers of layoffs at work. The foreign exchange volatility has been particularly tough on Chell, as the company imports most of its raw materials. Chell had expected positive macroeconomic indices following the change in government but the delays in policy implementation and slump in crude oil prices has led to a slowdown in economic activity.
Segun has realised that this might be the time to start saving. He had read something about a rainy day fund but with his current lifestyle and expenses, it may be difficult to cut back and save more.
Segun was laid off in April 2016. He was one of the first to go as the company used the LIFO(last in first out) redundancy option. It’s been less than 20 days since he stopped work but there are real concerns about his ability to get a new job with the prevalent economic environment. Segun was able to save enough to cover his expenses for two months, though he started saving late. He is now is considering other ways he can earn some income and hoping he will not have to do anything illegal.
Why you need an Emergency Fund (EF)
Segun’s story is similar to that of quite a few people right now. He had a great job and life seemed to moving in the right direction then all of that changed when he lost his job. Thankfully, he had some savings but realized that this would not last for long.
The crucial question is this;
When the unexpected happens, how do you handle it? Do you seek financial help from family and friends, take out a loan, use a credit card or do nothing? A quick answer and one thing that can help reduce the impact is to have an emergency fund.
In simple terms, an emergency fund is money set aside to cover the financial surprises and unexpected events of life. Many of these events are not only stressful and devastating but could also be very expensive.
Some common emergencies are
♣ Medical emergencies or debilitating illness
♣ Job loss
♣ Car issues
♣ Bereavement in the family
♣ Home repairs and incidents
It could also be for an intentional emergency. For instance, if you have to leave your job because it’s become so toxic that another week or month will be torture, would you have the means to do so?
How to create an EF:
The first step is to start now! If you don’t have one or started one but stopped when things were rosy. Please continue.
Some statistics show that about 78% of people will have a major negative event in any given 10 year period.
Let’s try a little exercise.
In the last 10years, how many major but unplanned expenses have you had to make?
I just checked mine and I’m surprised at the unprecedented number of life’s curveballs thrown my way. This just goes to show that in life, bad(not so good) things will happen. We need to create those buffers to lessen the impact of such occurrences.
The little steps you can take today:
1. Use a separate account
If you’re like me, you probably have a few accounts (you know you do). Choose one of these for your emergency fund. I will usually suggest that the money is not co-mingled with any account you usually do business with or use regularly.
2. Automate transfers
If you believe it may be difficult for you to coordinate the transfers or just a need to automate one more process, you can sign up with you bank to automate this process. You can tie this transfer to a day or a few days after you receive your income or some other inflow.
3. Save the change
If you’re not sure where the additional money will come from to create your EF, hwo about you start saving your change. Many times we toss the change we receive from grocery shopping, toll payments and other little purchases. You can have your very own savings jar and put the money in there. Remember that an Emergency Fund is different from your general savings account so should be in a different pool.
Three benefits of an EF
♣ You have a financial buffer to help you prepare for life’s eventualities.
♣ It keeps you out of debt and uncomfortable situations arising from debt
♣ It is another way to save money and protect your investments
What is the optimal size of the fund?
There have been different opinions on how much you should save in an emergency fund. The general expectation is that you save enough to cover your expenses of at least 3 months. I would usually suggest you go for at least 6 months of your monthly expenses and can increase this as you go along. It never hurts to have a sizable emergency fund.
However, I do realize some of us don’t have a clear idea of our monthly expenses. One quick tip will be to track your expenses this month to glean what your expenses are usually like. This exercise will also help you cut out any financial leaks.
“A journey of a thousand miles begins with one step”
Here is the chance to take the necessary steps today to better equip you to deal with life’s curveballs.