For how long do you think you can sustain your current standard of living if your appointment was terminated tomorrow? Oops, that was a little pessimistic and harsh, okay how long will your car have to sit at the mechanics before you raise money if you suddenly need to replace the engine in the car or if you get involved in a fender-bender?
These and many more are the harsh realities of life about how things can go wrong (a little) or terribly without any warning. However, having some money aside for the rainy days could be an important lifeline that could save you from stress, embarrassment or worse still, high-interest debts when the predictably unpredictable expenses surfaces. This piece is written to tell you about the emergency savings account and how you can set one up.
What is the Emergency Savings Account?
The emergency savings account also called the emergency savings fund is a readily accessible bank account with money set aside for the purpose of covering or offsetting unexpected but compulsory expenses.
4-Step Guide to Setting Up an Emergency Savings Account
1. Cover the Basic Expenses
In the introductory paragraph, I asked how long you would be able to maintain your current standard of living if you suddenly find yourself out of job; hence, the first duty of the emergency savings account is to make sure that you have enough to cover your basic expenses. First, you need to know how much those basic expenses cost.
For the next one month, write down every expense you make, no matter how important or inconsequential. The basics should cover the cost of food, transportation, shelter, pocket change for the kids, and remember to add up the cost of fuelling the generator. The first thing that will hint neighbors that something is wrong is your prolonged inability to use the generator.
2. Cover the Just-In-Case Expenses
After covering your basic expenses, there's always the occasional unexpected expense. I recommend bumping up your monthly expenses from the first step with an additional 10% to cover the just-in-case expenses.
Multiply the total amount by 2, 4, or 6 (depending on the number of months you'll like to be financially afloat if you lose your job.
Congratulations, you have just created the goal on how much money you need to keep in the emergency savings account.
3. Determine the QUICKEST Way to Save Up that Amount
One thing that I have discovered is that emergency expenses tend to appear when you least expect; otherwise, it won’t be an emergency. Hence, you are in a race against time to ensure that you have the money stashed away before the emergency arises.
Determine how much you can afford to put away each month towards meeting the emergency account goal. Eliminate some unnecessary expenses (look at your expenses from 1) in order to be able to save more money.
4. Determine the Best Place to Hide the Money
Rule number 1, the money should be in an account different from the one from which you withdraw money for your regular expenses. You may also want to consider a high-yield savings account such as the one offered by Access Bank.
However, if you choose to invest the money in your emergency savings account, make sure it is a highly liquid investment (that you can quickly turn into cash) and a low-risk investment that will ensure that you at least keep your initial investment in the worst-case scenario.
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