Emergency Fund: Why You Need One

At one point, life will throw you a curveball. Unforeseen events and expenses that will require you to use your money to handle them.

Like driving one night up a hill and finding a big stone in the middle of the road. A stone probably placed there to prevent a truck from rolling back down because it did not have enough power to go up the hill. A stone that you saw too late to avoid going over it. A stone that ends up damaging your gearbox so badly that you needed to replace it. Oh, and the onboard computer too.

Lucky for me, I had set up an emergency fund for such scenarios. It enabled me to pay for all the costs of getting my car back on the road without affecting my ability to pay my normal expenses for that month.

That is the importance of an emergency fund. And that is why you need one.

What is an Emergency Fund

Simply put, an emergency fund is money set aside to handle emergencies. It offers you a financial safety net to keep you going without having to rely on loans and other forms of debt. Like in my case.

Most financial experts recommend that your emergency fund should cover between 3-6 months worth of expenses.

To help you better understand, think of it this way. If you lost your job today, your emergency fund should keep you going for the next 3 -6 months without a drastic change in your lifestyle.

How to get started setting an emergency fund

For most people, saving money that can cover six months worth of expenses seems like an impossible task. But the thing to remember is that a journey of a thousand miles begins with a single step.

You have to first make the decision to make the journey and then take the first step. And this step is what you can afford right now.

Look at your budget and decide how much you can start with and then work your way to 3 months and then 6 months worth of expenses.

It is important for you to understand that it will take time.

Where to put your emergency fund

Before you can start building your emergency fund, you need to decide where to put it.

You should place it somewhere that you can easily access it in case of an emergency. And since you need all the help that you can get to grow it, place it somewhere that will give you good interest as you save.

The most obvious choice is a savings account. But recently, interest rates on savings account in Kenya have been on the decline.

So another great option would be a money market fund. They are low-risk investments that give you better returns.

Once you figured out where to place it, it’s time to build your emergency fund.

Here is an article I wrote on the best ways to build one.

Final note

I cannot stress enough how important it is to have an emergency fund. It provides a financial cushion that stops you from going into debt or touching your investments to pay the unexpected expenses that will come up.

And that helps in your path to financial freedom.