What is an emergency fund?
This is money kept away for future calamity or unforeseen expenses. Keeping money aside for a ‘rainy day’ is the sure way to prepare for an emergency. The funds should cover expenses for three to eight months.
The best way to keep money for emergencies is to start small and build up on the funds. Discipline is required to set aside money regularly.
3 great places to save the emergency funds
The emergency fund should be easily accessible and convertible to cash. However, there is an old saying” Out of sight out of mind”. There is a need to put the funds away from arms reach. This ensures that you don’t spend the money unless for a real emergency.
- Money market– Funds put here are easily accessible as there are no conditions given to withdrawals. The funds may be accessed in a day or two after the request for withdrawal.
The money market allows one to add more money to the account. The returns attract a low interest as compared to fixed deposits.
- High-interest savings account– This is provided by most banks and is safe as they are regulated by the central bank. The funds can be withdrawn easily. The downside to this is there are withdrawal conditions that will lead to loss of interest earned. For example, withdrawing funds before 3 months’ end will attract a small percentage loss of interest earned.
- Certified fixed deposit– Provided by financial institutions. Fixed deposits require one to have a lump sum of funds to invest. There are withdrawal conditions such as loss of interest if funds are withdrawn before maturity period. The interest earned may be higher than the other 2 accounts depending on the amount fixed and the time of maturity.
It is advisable to take short-term investment periods and renew the fixed deposit on maturity for accessibility purposes.
Examples of emergencies
- Loss of job,
- Illness that requires long-term treatment.
- Financial hardship,
- Emergency repairs such as for vehicles or houses.
Why is the emergency fund important?
- Provides security in the event of financial surprises.
- Reduces stress level when an unforeseen emergency occurs.
- Minimal misuse of other monies that may be in investments.
- Shelters you from loans and credit cards that were not planned for.
Money set aside for emergencies is not for investment therefore, consider financial options that are low risk because they are safer and easy to liquidate when the need arises. Safety and availability are the factors to consider where to put emergency funds.
Emergency funds are very important for investors as it protects them from withdrawing their investments before maturity.