Emergency Funds: Why and How to Build One

9 mins read

The only constant in life is its unpredictability. That’s why it’s always wise to prepare yourself for any eventuality.

When strapped for cash what would you rather do?

Wouldn’t it be easier to fall back on a reserve of your own than be forced to take out a loan and bear the burden of interest payments?

Even interest-free loans are burdensome if you know what I mean.

The importance of having an emergency fund cannot be overemphasized. And in this article, we’ll discuss the strategies that will enable you to build and maintain one.

What is an Emergency Fund?

An emergency fund is money set aside for periods of crisis. Unlike your retirement fund and other forms of saving, the primary purpose of keeping such a fund is not to gain returns on it over time.

Instead, it is strictly to be kept secure, safe from long-term value loss, and most importantly, be readily accessible when needed.

It can be tempting to put your funds in an interest-earning vehicle.

But sometimes, that could defeat the purpose of accessibility. It is important that the money be available whenever there is a genuine need for it.

It must be kept separate from your regular savings, retirement savings, and savings for investment purposes. It is your first line of defence against unforeseen events and as such must never be trifled with.

How to Save

Putting an emergency fund together can take time. It also requires a great deal of discipline.

First, you have to decide on the right amount to set aside for yourself and your household.

Afterwards, you may need to increase your income or effectively manage your available income, and this could mean cutting costs where possible.

The popular criterion is that you set aside at least three to six months’ worth of your essential expenses. This means that you have to take account of your actions:

1. Fixed expenses: These include core expenses such as rent and mortgage payments, school fees, child care, utility bills, loan repayments, TV and internet bills, and so forth.

2. Regular variable expenses: These are monthly expenses such as feeding costs, clothing, transportation, hospital visits, and other such expenditures that tend to vary month by month.

3. Occasional expenses: They come up once in a long while. They include such things as vehicle license renewal, gym memberships, etc.

By having a good sense of what your monthly and yearly expenses look like, you’ll then know how much to save up for emergencies.

There are several platforms that will help you keep a record of your spending.

Once you’ve made a list of your fixed and variable monthly expenses, go ahead and multiply that figure by 6. That’s how much you need to keep in your emergency account.

Then start saving up steadily until you hit that mark.

Ideally, you should factor in your emergency fund when making your monthly budget.

It should be treated as a core monthly expense until you hit your goal amount. In fact, it should always be among the first things you settle every time you receive your month’s earnings.

Surely, it might feel like a nonessential now. But in time, you will realize otherwise and your future self will thank you. Because by then, you will be able to bail yourself out of a difficult situation without breaking a sweat.

Where to Start

After calculating the amount to save in your emergency fund, you might be intimidated by the target and could even decide that it’s too much trouble to undertake.

To avoid that, and ensure you stick to the plan, it’s advisable to set a lower benchmark. Doing so will ensure that you stay motivated and eventually reach the target.

So let’s say that 3 million naira is the total amount that should be in your emergency account. Set a target of 200, 000 naira instead and start saving towards that amount.

If you succeed in reaching that smaller goal, you can start saving towards your next 200, 000. You do this repeatedly until you achieve your ultimate target of 3 million.

However, more important than setting a target, is deciding where the money will come from.

This is where the real work lies. You will have to pick and choose which expenses you are used to making regularly could be considered unnecessary.

Because putting money into your emergency fund will definitely reduce your disposable income.

You should look for ways to free up money without necessarily changing your quality of life. Sometimes, it’s best to increase your earnings rather than having to cut back. But in cases where that is not achievable, then there’s no other option than to find ways to reduce your day-to-day spending.

It’s not as difficult as it sounds.

Here are a few ways to maintain a good standard of living and still have a considerable amount of money to stash away:

1. Prepare your own meals and eat out less frequently.
2. Pay cash. Spending right out of your bank account could cause you to overspend.
3. Avoid impulse purchases. Make a list when going shopping.
4. Keep track of your spending habits.
5. Set a monthly spending budget.
6. Go for less pricier alternatives.
7. Cancel unnecessary/unused subscriptions and memberships.
8. Practice minimalism.

Staying the Path

As mentioned earlier, it takes time, patience, determination, and a little bit of good luck to succeed in saving up the full emergency fund amount.

Along the way, you may encounter some circumstances that force you to dip into what you’ve managed to save, making you start all over again.

But that’s the whole point, right?

Having something to fall back on in times of distress.

However, to reach your goal faster, it’s often not unheard of for people to change their lifestyle. And some go-ahead to negotiate a raise at their job.

These are some of the many benefits of setting an emergency fund target. It gets you to be more mindful of the way you live.

You consciously cultivate a healthy relationship with money.

Keeping Your Emergency Fund Secure

It’s important that the value of your money doesn’t decrease over time, especially with the continued naira devaluation and the increase in the price of various staple goods and services.
In the future, your emergency fund should either retain its current value or increase in value and not the other way around. Otherwise, there’ll be no point in having one.
You may want to consider getting a domiciliary account or purchasing stablecoins such as USDT.

Furthermore, your funds should not be so within reach that you can dip into it willy-nilly.

If it’s too exposed that you can be tempted to spend it without good cause, then the purpose is defeated.

So it’s up to you to know how to avoid spending from it when the situation does not call for it.


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Nick Jones

I'm Nick Jones, a finance blogger at AdranaFi. My writing provides valuable insights on investment strategies and market analysis. I'm dedicated to enhancing readers' understanding of finance and exploring new ways to engage them.

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