What is an emergency fund and how do you calculate it?

Photo by Markus Spiske on Unsplash

An emergency fund is just as the name implies. It serves emergency purposes. It is that money you can always run to when you don’t have any other means of income.

If for example, you were laid off at work like most people were during the early days of the global pandemic or if you needed to cater for the health challenges of a loved one or any sort of emergency at all, there should be money kept somewhere that you can run to. That money is your emergency fund.

The purpose of having an emergency fund is so that you don’t go begging unnecessarily.

It is possible to calculate how much you might need to have or save as an emergency fund.

How do you do this? It’s simple!

Ask yourself, “What amount do I really need to survive in a month? Or what is that amount that takes care of all my monthly expenses?”

When you get this amount, multiply it by 6 or multiply it by 12.

This will provide you with the amount you need to keep for survival for 6 to 12 months in the event of any unforeseen occurrence.

6 months is the least but you can have more than 6 months and you can prepare for a full year too.

Let’s take an example.

Imagine all your expenses for a month is N30, 000 (or the equivalent of 600 cedis) for food, transport, groceries, toiletries, internet and any other important needs you can’t do without.

Multiply this by 6 and you have N180, 000 (3600 cedis).

This should be the least amount in your emergency fund before you even think of investment.

Having an emergency fund is for you to have something to live on when something goes wrong with your finances. What’s the essence of investing all your life savings with no backup to cater for yourself in the case of an emergency?

When you invest your money, you don’t have access to that money for a period of time. Having an emergency allows you to have money stashed away to take care of yourself and your loved ones.

This is pure wisdom and it is something you should think about.

If you have taken care of your emergency funds and are now ready to get started with investments, check out these four questions you need to ask yourself before you start investing.

Looking to get started with investing in stocks? platforms like Investsika and Bamboo might interest you.

Know other interesting investment platforms? do share in the comment section. I would love to get a glimpse of them.

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