February.1.12‪Money Matters‬
Emergency Fund, Savings, Personal finances, Nimi Akinkugbe, Money, How can I save mre
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Far too many of us are completely unprepared for a financial crises and can get caught off guard. No matter how meticulous or organizsed you are about your personal finances, emergencies do happen when you least expect them and can sneak up on you, disrupting your budget so severely that it can take you several months or even years to recover.

The need for an Emergency Fund

Do you have any money set aside for a “rainy day”? Remember that life is full of uncertainties so it is important to set aside a sum of money, a cushion, to alleviate the shock of a completely unexpected event that leads to unplanned expenses. Major car or home repairs, a faulty generator or the more serious events such as the sudden loss of a job, a medical emergency or a death in the family feel even worse when there isn’t enough cash in place to take care of them. An emergency fund will help you deal with such situations if and when they arise.

Where should you keep the money?

It is important that the emergency fund is placed in an account where you can easily draw from without restrictions or penalties. Keeping money in an easy access account takes discipline so avoid using a current account to build your savings as you will be tempted to dip into it to settle your day-to-day bills and expenses. The most common places to park emergency funds are savings accounts and money market deposits.

As far as possible, your emergency savings vehicle should be risk free. Whilst it is important to shop around for competitive interest rates on your deposit, always remember that the primary consideration should be the safety of your funds and not the highest rate of return. In this regard such funds should not be invested in the stock market because market volatility could cause you to lose money in the short-term, if you are forced to sell shares when you have a sudden need for cash.

How much should you save?

ep2If you don’t have any savings at all, the key is to start with a small amount. This will take some time to grow but will encourage you to develop a savings habit; over time you can slowly start to increase your contribution to your fund. In general, a minimum of about three to six months of living expenses should be set aside. Some people will feel more secure with more money set aside than others who are able to cope with greater risk.

Naturally the appropriate amount that one should hold will vary from person to person. Depending on your particular circumstance, your family situation, your debt profile, and the type of insurance cover you maintain, will determine what amount makes sense for you. More serious life threatening emergencies should have been addressed by having the appropriate insurance policies in place.

If you are seriously in debt, it doesn’t make sense to keep a large amount of savings where the interest on your debt is higher than what you are receiving on your deposit. Whether you are in debt or not, however, you do need some savings you can rely on rather than having to resort to even more borrowing. Besides, it is far easier to simply withdraw from your deposit account, than to have to arrange credit at short notice and significant cost.

Guard your emergency fund carefully. You should not be dipping into it for incidental expenses; use it only in the event of a completely unexpected event or an emergency. If and when you are forced to dip into it, make every effort to replenish it quickly so that it is always available when you need it. Just knowing you have that reserve fund to help cope during these challenging times, will give you some peace of mind

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