How Do Emergency Savings Funds Work?

3 Mins read

An emergency savings fund is designed to help you when faced with unpleasant financial surprises. Hence, one can define an emergency savings fund as the big brother you run to when there is a serious financial issue beyond immediate control. It is a stash of funds that should be built over time, and not one that is tampered with within short intervals.

What this article is about:

1. Benefits of an emergency savings fund
2. How much you should have in your emergency savings fund
3. How to set up your emergency savings fund

Life plays a very funny game of hitting us with unpleasant surprises sometimes, with an emergency fund though you can beat life at its own game. Emergency funds come in handy when faced with job loss, health emergencies, natural disasters etc.

Benefits of an Emergency Savings Fund

An emergency fund has the major function of putting your mind at rest in the face of a crisis, as opposed to when you have no investment whatsoever to help abate the sudden impact of an emergency. That is emergency plans can serve as a stress reduction agent. Not having an emergency fund means you will usually need external help or loans whenever you run into money challenges. 

Other benefits of owning an emergency savings fund include:

  1. Protection of other investment goals: With an emergency fund set up, there will be no need to seek liquidation of other investments targeted at certain objectives you are building up to. You can read more about this in the Code of Depth and how it impacts your investment journey. You also can access your emergency funds anytime there’s an emergency that requires funds.
  2. Financial discipline: Stashing money away to hedge against life’s risks can help build your financial discipline and help cut down drastically on frivolous spending.
  3. Low financial burdening: with an emergency fund, you can avoid borrowing and putting yourself in further distress when there is a crisis.

How Much Should I have in my Emergency Fund?

The generally accepted amount one should target annually, based on suggestions from top advisors globally, is six months of living expenses. That is you should work towards gathering up an amount that can cater to your living expenses for six months in case you run into an emergency that blocks your income flow for six months.

The generally accepted amount one should target, based on suggestions from top advisors globally, is six months of living expenses. For example, if your monthly living expense is N200,000, your emergency fund should be N200,000 X 6 = N1,200,000. You can build this over 2 years by saving N50,000 monthly.

How do I Setup my Emergency Fund?

To save money for six months of your living expenses, you will have to first know how much you spend in a month. Multiply that amount by six. You can divide this amount by 12 or 24 to determine how much you need to set aside monthly as savings to hit your emergency fund goal. More importantly, automate the process of saving up for this fund.

Although an emergency savings fund is set up to help you prepare for unforeseen circumstances, you also earn some interests on it.

With the Cowrywise emergency plan, you can build up for emergencies. This provides you with the needed discipline to actually build up. Secondly, your funds are invested in secure vehicles like treasury bills and government bonds which have been adjudged to be the most secure forms of investment in the country. With that, your funds are not only secure, but they also earn you interest as they build up.

Why delay? Get started today here.

Please note that similar to purchasing mutual funds on Cowrywise, depositing into Emergency Funds require a 1.5% payment processing fee. This is however capped at N2000 which means that you don’t get charged more than that, irrespective of the amount you fund your Emergency Fund with.