| WHY YOU NEED AN EMERGENCY FUND |
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Week Ended 23rd September 2011 The Oxford English Dictionary defines an emergency as an unforeseen combination of circumstances or the resulting state that calls for immediate action. With regards to our personal finances, such emergencies could take the form of losing a job, unexpected medical bills due to sudden illness, car repairs, among others. How we respond to a financial emergency and how we come out of it is entirely dependent on how well prepared we are to tackle it. That is what an emergency fund is meant for: In essence, funds set aside to be used in an emergency, thereby serving the purpose of improving financial security by creating a safety net that can be used to meet emergency expenses as well as reduce the need to use high interest debt, such as credit cards, as a last resort. For most people, denial (hoping that, against all odds, an emergency will never catch up with us), and procrastination (putting it off until the day we will feel that we have more income to spare) play almost equal roles in sabotaging our efforts to have an emergency fund. However, nothing hurts your finances more than not having money you can access easily in the event that an emergency does occur. For most of us, the excuses are the same: i) I cannot afford to set aside money: The truth is that you need an emergency fund the most when you are just starting out or living from pay cheque to pay cheque. This is because, at this time especially, an unforeseen event could devastate your finances and force you to borrow money, which will obviously set you back even further financially. The conventional wisdom is to have enough funds set aside to cover three- to six-months' worth of living expenses. ii) I can use a credit card to cover emergencies: Credit cards can be very powerful in terms of personal financial planning, but it is never advisable to pile up any kind of debt where a less expensive alternative could have been utilized. Paying interest on any amount of debt is almost like giving away money that could otherwise have earned you interest elsewhere. iii) I can do it later when I have more money: Unfortunately, procrastination is a crippling habit. Someday never comes, and the older you get, the harder it is to break bad habits. Putting off savings and investments also robs you of the benefits of time, which is one of the greatest factors in successful wealth accumulation. It is through saving little by little that you are able to accumulate vast amounts of money over time. iv) I deserve a little luxury: The purpose of having a healthy savings plan is not to deny yourself the pleasure of buying things you like today. Not only should you be saving for emergencies, but you should also reward yourself by saving for things you may want to indulge in sometimes, which could be made easier by creating separate accounts for various savings goals, including occasional treats. Other than the peace of mind that an emergency fund gives you, an emergency fund is the best kind of ‘insurance’ you can have to cover many of life's unexpected expenses. A lot of financial difficulties can be traced back to a few common root causes, and one of these is lack of emergency savings. However, it is important to recognize what a true financial emergency looks like. Here are some examples of things it is okay to spend your emergency fund on: Making ends meet when you are unemployed, medical emergencies, essential car repairs, critical home repairs, recovering from a natural disaster, among others. Conclusion: Ultimately, the best way to be prepared for unexpected expenses is to rely on yourself - and an emergency fund is the best way to do that. An emergency fund is just one component of your overall financial health and ignoring it could prove to be very costly down the road. It is important to balance saving for emergencies with your other financial priorities, like paying down high-interest debt and saving for retirement. You can send your comments or questions to This e-mail address is being protected from spambots. You need JavaScript enabled to view it , or visit our offices at Ecobank towers, 7th floor, Muindi Mbingu street. You can also follow us on our facebook page- Zimele Asset Management ( Kenya)
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