If there is anything that COVID-19 has made us realize, it’s the importance of having an emergency fund. For a lot of people, an income loss is certain in the coming months all thanks to #TheLockdown, with no hope in sight, an emergency fund (if available) is that lifesaver that would help people stay afloat until all this is over.
By now, you’re probably wondering, what exactly is an emergency fund? An emergency fund is simply a savings account with 3–6 months of your living expenses set aside for unforeseen circumstances and emergencies. Situations that qualify as an emergency includes Total or partial loss of income, job loss due to a global Pandemic like COVID-19, Death of a financial provider e.g. parents or spouse, Huge medical expenses, Unexpected repairs of your car/home, and other related expenses.
In the case of any of these emergencies arising, your emergency fund is supposed to act as a financial buffer to help you take care of this unforeseen event to a large extent, without going bankrupt, taking high-interest loans or even liquidating your long term investments.
Simply put, an emergency fund is a stash of money that can keep you afloat and pay for your living expenses in a situation where you are unable to receive income for 3–6 months.
Why an emergency fund?
Here’s a simple illustration — Two friends, Simi and Ahmed work at the same firm where they have well-paying jobs.
When Simi landed this job, her first financial goal was to save towards having 3–6 months of her living expenses in an emergency fund. To achieve this, she calculated the estimated amount needed to cover her basic needs for a period of 6 months and transferred some parts of that amount monthly to her Paga account. A couple of months down the line, Simi had successfully built her emergency fund and felt confident to begin saving for her long-term investment goals.
Ahmed, on the other hand, did not save towards an emergency fund. After receiving his first paycheck, he immediately started stashing his savings in long-term investments.
A year later, Simi and Ahmed unexpectedly lost their job due to a mass retrenchment exercise by the firm, suddenly, they had lost their sole source of income. When Simi heard the news of the retrenchment, she was not worried about how she would cope financially because she knew she had 6 months’ worth of living expenses saved up in her Paga account. Knowing that her finances were sorted gave her the peace of mind to focus on finding and vetting new job opportunities.
Ahmed, on the other hand, was desperate because he did not have an emergency fund, he knew that the money left in his salary account would last him for just a month. He had a dilemma on his hands, either get a new job as soon as possible or liquidate some part of his long-term investments prematurely, losing some money in the process. Sadly, Ahmed couldn’t get a job fast because of the economic crisis, he ended up making hasty and unwise financial decisions simply because he did not have an emergency fund.
Where should you save your emergency fund?
Simple, In a short-term, liquid and accessible account. As the name implies, emergency funds are for unplanned expenses that can happen without notice, therefore your emergency fund needs to be kept in an account that is easily accessible such that you’re able to retrieve your funds when needed in a 24–48 hours’ time frame.
Paga makes saving for your emergency fund possible, with the 24/7 Paga account, you can deposit and withdraw money whenever you want.
Just Paga it!
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