Creating and Growing an Emergency Fund
An emergency fund is money set aside in a separate account to be used in case of true emergency from unexpected bills to job loss in order to protect financial wellbeing. Recent financials challenges resulting from the CODVID-19 pandemic has brought to the fore more than ever the need for an emergency fund. It is recommended an emergency fund should hold between three to six months of expenses. Building an emergency fund should be considered a priority.
The purpose of creating an emergency fund is to have money immediately available in case of an unforeseen event. For this reason, emergency funds should be kept in cash or a liquid investment so that the value of the fund does not reduce as this will defeat the motive of the fund. The following are places where emergency funds could be held;
- Savings account – High yielding savings account serves as an option for keeping emergency funds. The account should be an interest bearing account and should not attract charges. The account must have low or zero minimum balance requirement.
- Money Market Fund- Money markets funds offers above average interest rates. Money market funds are liquid and offers investors quick withdrawal options ranging from one to three days. Before opting for a money market fund, check the minimum account balance and related loads.
Managing an emergency fund requires great discipline. Before setting up an emergency fund, there is the need to set goals on how and when this fund shall be used. The fund must only be used in emergency situations. The following steps serves as a guide to establishing and growing an emergency fund;
- Start small: For most people, the thought of setting aside funds to cater for three to six months of living expenses can be daunting. The right approach is to break down the process, start by saving small amount of money and increase the amounts if you are comfortable. Build up one month of expenses in the account and gradually increase to two months and three months.
- Chose an investment option: The objective of setting up an emergency fund should guide in selecting where the funds are kept. The fund should be easily accessible and should not lose value. Emergency fund can be saved using multiple investment options. Speak to an investment advisor if you need advice on the options suitable for you. To be continued….