Last time we talked about paying yourself first.
Today I want us to talk about what to do with that money you pay yourself.
First, build a three to six months emergency fund.
What is an Emergency Fund?
Have you heard of these phrases before?
The middle class is one crisis away from poverty…
Or…
I’m one paycheck away from being broke…
The sad truth is these are not just hypothetical statements. They’re true.
Many people are heavy on overspending, and less on saving for a rainy day. They spend everything they earn to maintain their inflated lifestyles, and then they spend some more by borrowing loans from mobile apps, banks, friends, and relatives. They believe in YOLO, living today and letting tomorrow take care of itself.
While I’m not against one’s choice to live in the moment, the thing is, it only takes one crisis for the House of Cards to come crashing down.
You cannot predict an emergency, but it remains an inevitable part of life.
At one point or another in your life, whether you’re ready or not, an emergency knocks on your door.
It could be an illness.
It could be the loss of your job.
It could be the death of the primary income earner of your household.
It could be your car broke down.
An emergency could be anything like getting a job that requires you to move to another city but you don’t have the means to facilitate the move.
Life happens.
However, wouldn’t it be nice when an emergency happens, to not have to worry about the financial turmoil it has brought with it?
An emergency fund is a financial cushion that allows you to pay off an emergency without affecting your lifestyle or forcing you into debt.
It’s a shock absorber of a crisis.
Got laid off suddenly?
No worries.
Your six-month emergency fund will allow you to continue supporting yourself while you figure out your next steps. And the best part is, you won’t be desperate to take any job you can find because your emergency fund gives you both time and flexibility.
Where Should You Put Your Emergency Fund?
Should you invest the money in your emergency fund?
I know this temptation.
There’s a small voice that tells you it’s better to invest that money to generate more income than to have it just lying around somewhere.
But I’ll tell you what, resist!
Resist the urge to invest the money meant for your emergency fund.
No, don’t buy land with your emergency fund.
No, don’t buy stocks with your emergency fund.
No, don’t lend out your emergency fund.
When you invest away your emergency fund, you lose liquidity.
Liquidity is how easy and fast you can convert an asset into cash, and if there’s one thing land, cash, and loans have in common it's they don’t have a fast turnaround. If anything, in case of an emergency, having to liquidate these assets causes you to lose money instead of a profit which only causes them to lose their purpose. How fast can you sell land to raise two million Kenyan shillings to pay for an urgent surgery?
The wealthy and the mafia are right.
Cash is king.
And in an emergency, cash is everything.
So, What Should You Do?
Open a bank or a mutual fund savings account and put your emergency money there.
Yes, there’s little to no return on having a bunch of money lying around in a bank account, but what you gain is worth more in case of an emergency.
You’ve peace of mind.
You’ve liquidity and fast access to your money within twenty-four to 48 hours.
How much should you put in your emergency fund?
There’s no one-fits-all number for everyone.
This is because we all have different bills to pay to facilitate our varying lifestyles.
What you should do is, sit down with your pen, paper, and calculator (I’m traditional like that, lol), and calculate how much you spend in a month. Calculate how much you pay for rent, water, electricity, food shopping, subscriptions, and whatever else you need to survive every month.
Then, whatever your total is multiply it by three months or six months, and if you’re anxious like me, multiply it by twelve months.
Once you have your number, figure out how much you can comfortably save towards your emergency fund every month. Don’t strain yourself to save everything at once. If you can, well and good. But if you can’t, give yourself grace and patience to save consistently month after month until you reach your goal.
And that’s it.
Until next time, bye!
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