Building an emergency fund is not a widely practised financial habit in Nigeria, with many individuals often facing challenges when it comes to being able to meet up with emergencies when they arise, and unfortunately, unexpected costs can swiftly derail one’s financial stability in Nigeria’s volatile economy.
The low percentage of Nigerians who have access to emergency cash is due to a number of variables, including a lack of knowledge of formal banking services, a lack of financial education, and low-income levels. The current economic climate, with its high unemployment and rising prices, also makes it challenging for individuals to save money for emergencies.
It’s crucial to understand the importance of having an emergency fund to fall back on in times of economic uncertainty, and that is why in this article, we will be diving into the world of emergency funds and offering suggestions for how to start saving for one in the context of Nigeria’s economy.
A recent survey by Bankrate in the United States found that a worrying number of American consumers (one in four) have trouble coming up with $1,000 for an emergency, so it doesn’t mean that living in a functional and structured economy gives individuals an edge in building their emergency funds. It’s a personal habit that needs to be cultivated, irrespective of where they reside.
Let’s look at what an emergency fund is.
Emergency funds are money saved aside for unexpected expenses. It protects people and families from financial shocks and provides fast cash without credit or debt. An emergency must have:
Accessibility: Funds should be liquid, like in a savings or money market account, for ease of withdrawal when needed.
Adequate Amount: An emergency fund should cover emergency expenses. Financial gurus advise saving three to six months of living expenses. The appropriate quantity depends on personal circumstances, job stability, health, and support systems.
Use: Emergency funds should only be used for true emergencies like medical bills, job losses, costly car repairs, house repairs, or unexpectedly important trips. It is important to distinguish between emergencies and non-emergencies.
Consistent Savings: Building an emergency fund requires consistent, disciplined saving. Setting aside a percentage of income for the fund should be done regularly. Keep the emergency fund distinct from other savings and investments to minimise confusion and maintain its purpose. This prevents non-emergency withdrawals.
Emergency funds give families financial security and peace of mind and it buffers financial disasters without debt or outside help.
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What amount should you have as emergency funds?
Figure out how much you spend on essentials like rent, utilities, food, transportation, healthcare, and debt payments on average each month. Multiply this number by the number of months you want to have in your emergency fund. Most financial experts say you should save enough money to cover three to six months’ worth of bills, and this is what I teach as well, but this can change depending on your position. This will serve as a buffer in case of a loss of income or job.
Practical steps for building your fund if you live in Nigeria.
As earlier mentioned, an emergency fund serves as a safety net, allowing you to rest easy in the face of life’s curveballs like sudden medical bills, automobile breakdowns, or job losses. Having a savings account set aside specifically for unexpected events is one way to prevent falling into debt and keep your financial footing secure.
1. Step one is to take stock of your financial status right now. Find out what you’re making, spending, and saving each month. Figure out how much money you need to pay for things like housing, transportation, food, and medical care. Using the results of this analysis, you may set a reasonable goal for your savings for unexpected expenses.
2. Begin with a small emergency fund and increase it over time. Determine a goal that is reasonable given your current financial situation. Try to save up enough money to cover your living costs for three to six months. While this may seem insurmountable, remember that each effort, no matter how modest, moves you closer to your objective.
3. Cutting back and increasing income: If you want your emergency fund to grow faster, one strategy is to cut back on costs. Think about how you spend your money and where you might make cuts without compromising your quality of life. In addition, think about ways to supplement your income, such as freelancing or launching a small business. You can put the additional money into an emergency fund.
4. If your emergency fund has to be spent, it is imperative that you replenish it without delay. Get back on track with your monthly contributions and think about ways to speed up the recovery, including putting any unexpected bonus money or windfalls straight into the fund.
Financial security and peace of mind are impossible to achieve without an emergency fund, especially in a country like Nigeria, where the economy is notoriously unstable and unplanned expenses can creep up at any time. You can proactively protect yourself against financial shocks by understanding the significance of emergency funds, assessing your situation, setting realistic goals, prioritising and automating savings, reducing expenses, increasing income, keeping your funds accessible only for emergencies, and committing to rebuilding the fund when necessary.
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