Emergency Fund vs. Emergency Plan

When it comes to building a emergency fund, the biggest challenge is building up the recommended amount. This is so because many people depend on their single and inadequate paycheck to build up the fund.

“If I can’t manage to save for one month expenses, how possible to save for 3, 6 or 12 months expenses?”

Probably that’s what you are asking but you know what :

1. It’s not a onetime activity such as getting a loan or large cash somewhere and put it aside as an emergency fund

No! That’s not it.

If one does not have a reserve fund or find it difficult to save money, the key is to start saving small amounts. While the small amount will not add up that fast, the important thing is to start putting something away and to make it a habit.

Success in building your fund depends on consistency in putting away money on a regular basis, and the ability to resist digging into it for non-emergencies.

2. You can do it in other ways apart from allocating a specific amount in your paycheck

If allocating a certain amount from your income for this fund is difficult, try these strategies:

  • Put the savings from previous month into your emergency fund. If you have been using money saving tips, you can use the savings you realize every month to build up your fund. Put those savings into a separate account.
  • When buying or intending to spend on something, budget big and then save the difference. For example, let’s if you normally spend between Ksh 3,000 and Ksh 4,000 on groceries. Budget Ksh 5,000 for groceries, and save Ksh 1,000.
  • If you get a cash gift from a relative or friend, Christmas bonus, or a tax refund, or some other such windfall, don’t spend it. Direct it to your fund instead.
  • Sell something you can do without that isn’t an asset (not income generating). For example, if you have two personal cars, see if you can live without one of them. Alternatively, if you have one car, sell it and buy a cheaper used model and save the difference.

Inadequacy of An Emergency Fund

An emergency fund can work fine if your emergency doesn’t eat up your reserve fund before it is solved. If your emergency prolongs for more than the period you had set your fund to cover, then this strategy of dealing with emergencies is inadequate.

For example, when you loose a job, it can take more than 3, 6, or 12 months to get a new one. So, what happens after you have out-lived your fund? Before it comes to that, have an EMERGENCY PLAN instead of just an emergency fund.

  • Obtain Some Basic Insurance Covers such as health insurance, disability insurance etc.
  • Build an Emergency Fund.
  • Have Access to Other Sources of Cash for emergency needs such as:

    1. A line of credit at a commercial bank (e.g. an overdraft facility),

    2. Emergency loans from cooperatives,

    3. Always keep an unused or rarely used credit card at the ready. The cash advance provision offered by major credit card companies can also be used in an emergency. Nevertheless, use a credit card only when you know your emergency situation will be resolved before your bill is due.

    Remember, the lines of credit, emergency loans, and credit cards have a ceiling that limits the amount of available credit.

  • Reducing Expenses. In an emergency situation, cutting down on your expenditure will help you stretch your fund.
  • Assistance From Family and Friends. In a worst case scenario, this can be one of your options. However, “As long as you are in a true emergency, are seen as trustworthy, and don't have a history of asking for financial favours, your family and friends might help if they are in a position to do so. I've found the more compassionate you are, the more likely the people in your life will be compassionate towards you. But just like credit, asking for favours should be a last resort.” -Flexo

Emergency Fund | Building a Financial Reserve

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