“Rehearse them in your mind – exile, torture, war, shipwreck: all the terms of our human lot should be before our eyes.”- Seneca
No one, myself included, hopes to be broke or be assailed by tough economic times. If anything, one of the global goals of our modern world is to eradicate poverty. Unfortunately, unless you were born into a super-rich family, or you are Bill Gates daughter, harsh economic times will assail you at one time or another. Therefore, instead of letting such a moment find you unawares and your savings unattended, like Stoics, it is best to prepare long before the moment comes. So that when the moment comes, you are not getting into debt left right and centre trying to survive.
So how do you prepare?
By creating an emergency savings fund.
I came across the 50-30-20 rule when improving my financial literacy via Youtube University. It is a financial rule that suggests that 50% of one’s income should go to basic amenities such as rent and bills and paying off mortgages, 30% to lifestyle needs such as entertainment, and small luxuries and 20% should go to savings and/or a retirement plan.
Of all the “financial rules” I have come across this one makes a lot of sense. If one is not saving at the moment, or saving less than 10% of their salary, the 20% will improve the savings by a wide margin.
However, if one is already saving the 20%, finding ways to increase that percentage will make your savings account happier.
The best way to save is to find your why. And in the case of emergency fund savings, the why is to prepare for harsh financial times. It is recommended that one saves an equivalent of 3-6 months of living expenses. So from the 20% set aside for savings, you can allocate a percentage that goes to the emergency fund, while some of the other money goes into an investment fund, and another say for a travel fund.
The emergency savings fund should take priority over the other savings since it will cushion you in the event of a calamity. Since it requires a considerable chunk of money, without doubt, it will take financial sacrifice and a while, maybe even a year, to hit the 3-6 months living expenses.
The living expenses accounted for while structuring the emergency fund should include:
- monthly rent or mortgage payment
- monthly payments that will attract penalties such as loan repayment
- transportation and vehicle repair expenses if you have a car
- food and other home utilities that you cannot live without even when scaling down expenses such as electricity
- personal expenses such as braiding hair, manageable medical expenses
Harsh economic times that call for an emergency fund to be dipped into are
- a sudden illness in the family or to oneself
- sudden unemployment or unemployment in general through say an economic recession or being fired or a company filing for bankruptcy
- a sudden change in the economy that requires readjustment or an unforeseen situation that will require lots of money.
The best ways to grow the emergency fund and to prepare for harsh economic times is by
- first, creating an emergency fund financial plan. This will help you know the ultimate figure you are working towards. It will also help you know how much you need to put towards the fund and how long it will take to reach 3 months, 6 months of living expenses.
- living below your means – cutting down on unnecessary expenses will leave you with more cash to direct towards the plan. budgeting every month can allow you to see which expenses are unnecessary and which ones are important.
- finding a secondary source of income that will increase your income bracket. The best part about having a secondary source of income is that you have more disposable income,m thus more available for saving. It also buffers the individual if they experience harsh economic times due to losing the primary job.
What are some of the other ways one can grow their emergency fund?
Thank you for reading!
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