5 Steps to Having a Financial Safety Net: The Art of Building an Emergency Fund.

Hey Buddy,

Nobody hopes for an unforeseen circumstance, the phrase “Life happens to you fast” is one you cannot really put aside. While we understand that emergency savings isn't a top priority because we have a ton of other immediate expenses and the economy isn’t exactly smiling, we still have to prioritize emergency savings.

What is an emergency fund? A reserve of cash set aside for unforeseen costs or crises is known as an emergency fund. It can assist you with handling expenses related to job loss, home repairs, medical costs, and other potential financial emergencies. An emergency fund might ease your mind and keep you from incurring debt or using up your investments or savings.

How much should you put aside for emergencies?

The answer to this question will vary depending on your goals, lifestyle, spending, and income. But as a general guideline, you should have three to six months’ worth of living expenses in your emergency fund. If your monthly spending averages 100,000 naira you should aim to have between N300,000 and N600,000 in your emergency fund.

Of course, this is only a generalization; depending on your circumstances, you might require more or less money. The secret is striking a balance between preparation and realism. And while this figure can be daunting and discouraging for many, especially if you’re living paycheck to paycheck. You must shake off the pressure to build your emergency fund overnight. It’s impossible to do so. Focus on the determination and consistency to pull this off and you’re well on your way to financial security.

5 Steps to building your emergency fund:

1. Set Realistic Savings Goals: To start accumulating an emergency fund, you must first decide how much you want to save and then create a clear, attainable goal for yourself. Calculate your monthly spending on necessities like rent, utilities, food, transportation, insurance, debt payments, and so on to set up your target. Then divide this sum by the months you want your emergency fund to last. For instance, your objective would be 600,000 if you spend N100,000 per month on necessities and you want to have up to 6 months saved.

Please write down your goal amount and keep it visible immediately. Also, rather than shooting for three months’ worth of expenses right away, shoot for one month. Or two weeks. Whatever it takes to make your first goal seem doable. Reaching that first goal can give you the motivation to keep going. Set your second goal higher — and the third even higher. Building savings will become a habit, and the positive motivation you build by reaching the smaller goals will encourage you toward larger ones.

2. Create a Budget and Stick to it: Tracking your spending and determining where your money is going is the next stage in creating an emergency fund. This will show you where you may save or eliminate expenses to increase your emergency fund. You can use a budgeting tool, a spreadsheet, or a straightforward notepad to keep track of your expenses. It is crucial to record every purchase you make and classify it into numerous categories — such as housing, food, entertainment, etc. — . Review your spending at the end of each week or month to determine how much you spent in each category and how to address financial leaks and overspending.

Budgeting only works with consistency and should be realistic so leave room for miscellaneous expenses. The 50/30/20 rule is a guide for those who are just starting: Reserve 50 per cent of your income for day-to-day needs, 30 per cent for your wants and 20 per cent for savings, investments, and debt repayments.

3. Automate Your Savings: Out of sight, out of mind: the easiest way to save money is never to touch it in the first place and automating your savings makes it more straightforward to save money. Setting up a direct transfer from your bank account into your Wealthbuddy personal savings account designated for your emergency fund is one approach to achieving this. You will automatically save money in this manner each time you are paid and gain attractive interest while doing that.

4. Withdraw only during Emergencies: Emergencies are those sudden occurrences that require your immediate attention. Medical emergencies, fixing your car, or losing your income — things you need to handle to survive and should only be used for such. You might choose to dip into your savings to relocate to a new country for a dream job or embark on an entrepreneurial venture. The key is replenishing your emergency fund once you have drawn from it. Re-evaluate your savings and investment plans — you might have to put some financial goals on hold while you build up your emergency fund again. Resist the urge to tamper with your emergency fund at the slightest inconvenience. It defeats the purpose of having a financial safety net and shows a lack of financial discipline.

5. Increasing your income: Increasing your income and earning additional money is another way to reach your emergency saving goals. Various approaches can be taken, depending on your preferences, availability, and skill level. Examples include:

a. Requesting a pay increase or a promotion in your existing position.

b. Acquiring a part-time job or side business, you can conduct in your free time.

c. Having a garage sale or selling some of your unwanted or unused stuff online

d. Performing microtasks or internet surveys to earn extra money.

Bonus Tips: Wealthbuddy plans to fit your goals:

Personal target savings: This savings type allows you to set a financial goal towards which you can save in incremental amounts on a daily, weekly, or monthly basis with the money deducted automatically via card or money in your wallet, with a minimum locking period of two months. You can also top-up this savings type if you miss a payment or have extra cash. Upon maturity, all saved amounts and your interest are credited to your wallet and can be withdrawn. This savings plan currently has an interest rate of up to 15% per annum.

Fixed lock savings: This savings type is designed for you to put away a fixed lump sum of money which cannot be accessed for a specified period. This money will not be available till the specified date of maturity so only use this savings type when you are sure you will not need the money, with a minimum locking period of two months. This savings plan currently has an interest rate of up to 13% per annum.

Fixed Flex Savings: This savings type is designed for you to put away a fixed lump sum of money for a specified period which can be accessed during emergencies at a 20% charge of the accrued interest. This savings plan currently has an interest rate of up to 10% per annum.

Balancing debt and your emergency fund

If you are in the process of paying off high-interest loans or credit cards, be sure to balance your desire to accumulate an emergency fund with your need to get out of debt. It’s important to save for emergencies, but every day that you’re still in debt it costs you money. What you’re saving in one account could end up being cancelled out by the interest you’re being charged in the other. Instead, you may want to set a more modest emergency fund goal at the start and put any additional amount you can toward your debt. Once that is retired, you can accelerate your emergency fund savings and raise that goal. In the meantime, having a small cushion is better than having no cushion at all.

Where to Keep an Emergency Fund.

Your emergency fund should be relatively liquid, meaning you can access it easily and quickly without having to sell or cash out other investments. At the same time, you don’t want it to be so accessible that you are constantly dipping into it to cover everyday expenses.

Keeping your funds separate from your regular savings or checking account can help ensure you don’t spend it on anything other than real financial emergencies. To maximize your savings, you might consider keeping your emergency fund in an account that earns more interest than a regular savings account.

“In conclusion, building your emergency fund is a crucial step towards financial security. By following these steps and utilizing Wealthbuddy’s tailored savings plans, you’re not just saving for emergencies; you’re investing in your peace of mind. Remember, financial well-being is a journey, and we’re here to guide you every step of the way.

Cheers to a secure and thriving financial future!

With Love,

Your Personal Wealth Advisor 💚