How Much Is Enough for Your Emergency Fund?

Sep 14, 2022

Good Morning 😃

How are you doing?

Life has a way of hitting people with unpleasant surprises or situations that are beyond control. The reality is that we win some and lose some. Financial surprises is one of the situations you should not lose. With an emergency fund, you should be able to beat life at its own game. Emergency funds come in handy when faced with job losses, health emergencies, natural disasters, house repairs, car troubles, etc.

What is an emergency fund?

An emergency fund is a separate savings or bank account used to cover or offset large, unexpected expenses or financial surprises life throws your way. It shouldn’t be calculated as part of a long-term savings plan for college tuition, a new car, or a vacation. Instead, this fund serves as a safety net, only to be tapped when an emergency occurs.

Benefits of an emergency fund

Emergency funds create a financial buffer that can keep you afloat in a time of need without having to rely on families or high-interest loans.

1. It helps keep down your stress level

It's no surprise that when life presents an emergency, it threatens your financial well-being and causes stress. If you're living without a safety net, you're living on the "financial" edge and hoping to get by without running into a crisis.

Being prepared with an emergency fund gives you confidence that you can tackle any of life's unexpected events without adding money worries to your list.

2. It keeps your spending in check

You've heard the saying, "Out of sight, out of mind." That's the best way to store your emergency money. If the cash is only as far away as your normal savings account, you may be tempted to use it for something frivolous like buying a new wig or getting a new dress or shoes—not exactly an emergency.

Keeping the money out of your immediate reach means you can't spend it recklessly, no matter how much you'd like to.

3. It keeps you from making bad financial decisions

There may be other ways you can quickly access cash, e.g. borrowing, but at what cost? Interest, fees, and penalties are just some of the drawbacks. Having an emergency fund will ensure you do not take loans in the face of unexpected financial situations.

How much should I have in my emergency fund?

The general rule one should target based on suggestions from top advisors globally is six months of living expenses. For example, if your monthly living expense is N100,000, your emergency fund should be N100,000 x 6 = N600,000. You can spread this across months or save in bits as you have funds.

Where should you put the money?

Emergency savings can be placed in a savings account with flexibility. You can also go for a high-yield savings account.

It should be separate from the bank account you use daily, so you’re not tempted to dip into your reserves.

An example of a high-yield savings account that offers up to 10% return is Ladda. You can download the app here;