Business News Sun, 12 Jul 2020
Have you ever found yourself unable to work due to ill health? Have you been a victim of corporate layoffs? Have you been stranded with your car that won’t start?Unexpected events are a part of life. That is why we need to Save a Cedi a Day, create an Emergency Fund to prepare for such occasions.
Wouldn’t it feel great to have a buffer, a cushion that helps you cool off because a crisis turns into a minor inconvenience?
Financial managers and analysts do not agree on some principles, however having cash aside is one thing that brings them together, and surely, it’s an essential component of a good financial plan. The debate may only be the amount of cash to put aside so that you do not waste money.
Putting money aside for emergency purposes is not an easy task. But not having an emergency fund when disaster strikes sure can be more stressful and painful. Why put your mind on borrowing when you can help yourself?
While we can admit an emergency fund won’t solve all your money problems, it’s a great start to getting your finances heading in the right direction.
What is an Emergency Fund?
An emergency fund is simply money set aside for life’s unexpected events. It does not matter how much you want to start with, the most important thing is to start today and be consistent.
Where should I keep my Savings?
Your emergency fund should be liquid. It should be kept in a financial asset that is cash or cash equivalent. Being able to access your money in less than a week after a request is the best way to go.
How big should an emergency fund be?
The more stable your income, the less you need an emergency fund. The advent of Covid-19 tells us that even “stable incomes” have not been stable enough; some businesses have been lost and salaries have been cut. Cash is king!
It is important to aim for a six-month emergency fund to get prepared when a big emergency hit. There is a saying that if you are unable to stay away from your salary for six months, you should consider yourself poor.
When should an emergency fund be used?
When the need arises, why not? But note needs are not wants, assess the situation to be sure its not a want. Wants are simply desires we can live without. Needs are stuff we must have to survive; food, water, shelter and others.
In touching your emergency fund, ask yourself these; did the situation happen unexpectedly and is it urgent. A ‘yes’ to both justifies using money from your emergency fund.
How do I start?
Draw a budget and be disciplined.
Make a list of items that generate cash inflows and cash outflows. This will help you know how much you can put aside.
Set your objective- Save a Cedi a Day
How much do you want to have in your account in 2, 3 or 5 years? Do a calculation of how much you should save a day from today to get there. How much you are saving a day can be increased as your income increases.
It’s happened so many times that as you save up some money in your emergency fund, the emergencies come along and wipes all away. You do not need to give up. Just imagine if the emergency fund wasn’t available. The situation would have been worse off.
Attention should rather be channeled to whether your emergency fund is been underfunded or overfunded.
Whiles underfunding may leave you exposed when there is an emergency, overfunding can hurt you because the excess could be invested in other assets to earn higher returns.
Source: Goldstreet Business