By Babajide Komolafe
Nobody prays or desires for an emergency, but emergencies happen. Sudden job loss, serious illness, loss of a breadwinner, accidents and major financial losses can happen to anyone at any time.
Some financial emergencies result from personal decisions, while others are triggered by events beyond an individual’s control. The global financial crisis of 2008, the COVID-19 pandemic and the Russia-Ukraine war are examples of events that have disrupted businesses, destroyed jobs and reduced incomes.
Some emergencies result in loss of income, while others require financial resources far beyond what can be provided from one’s current income. When this happens, some people resort to borrowing or begging for financial assistance from relatives, friends or others. This can be demeaning and may expose the individual to exploitation. That is why you need an emergency fund.
An emergency fund is money you deliberately set aside to deal with unexpected and necessary expenses, including a sudden loss of income.
Savings help you achieve your financial goals. Investments help you grow your money. An emergency fund protects you from the financial uncertainties of life when they occur.
So, how do you build an emergency fund? Gradually. Little by little.
You can start by setting aside enough money to cover your basic needs, such as food and transportation, for one week. Once you achieve this, increase the fund gradually until it can cover your essential expenses for three months.
After that, work towards building enough to cover six months or more of essential expenses, particularly if your income is uncertain or you are responsible for a family.
The money in your emergency fund is not for routine or normal expenses. It is reserved for situations that require urgent financial attention. This requires discipline because the temptation to spend money that is readily available can be strong.
Think of an emergency fund as your financial shock absorber. Its purpose is not to make you rich. Its purpose is to prevent a financial shock from becoming a financial crisis.
The human body provides an illustration. The body stores energy that can be drawn upon when food is temporarily unavailable. In the same way, an emergency fund stores financial resources that can be drawn upon when your normal source of income or financial support is disrupted.
You may not know when the emergency will come. But you can decide whether you will be financially prepared when it does.
(To be continued)