Build an emergency fund to safeguard a steady future

For the last five years, Patrick Muiru, a city-based secondary school teacher, has been driving to work daily. Over this time, he has had an uneventful drive save for the usual hassles occasioned by the snarl-ups that characterise major city roads.

However, towards the end of last month, the unexpected happened. It was mid-morning and there was a thick mist. As he approached the traffic lights near the Nyayo Stadium roundabout, the car ahead of him slowed down without any warning.

Muiru rammed into the rear of the car. Thankfully, the damage to the other car was not extensive and the driver said they could settle the matter amicably, away from the glare of the hawk-eyed traffic police. They agreed that Muiru would pay Sh25,000 to repair the damaged car.

Although the deal was acceptable to him, he was stuck. He did not have that kind of money and had nobody in mind who could lend him the cash. Luckily, a colleague offered to bail him out.

Muiru’s predicament is not isolated. Many people get jolted when the unexpected happens and there is no fallback. These situations call for an emergency fund.

Unforeseen events can range from illness, accident or litigation to job loss. Are you prepared for such eventualities? If not, stop worrying and start an emergency fund.

Such a fund is a form of saving that can take care of essential needs, mostly your living expenses, for a given time. This is different from a loan, which you must refund whether with interest or not.

Although financial experts may not agree on how much is enough for an emergency fund, many contend that it should be equivalent to at least three to six months of your living expenses. However, the most realistic amount is that which would give you a sense of peace and security.

How do you set up an emergency fund? “The first step entails deciding how much you want to save. This should be pegged on the amount that would make you feel secure. However, if you have not been saving, you should start with small manageable amounts,” advises Millicent Obura, a financial expert working with a Nairobi firm.

She adds, “Then ensure that you have a bank account. It is advisable to open up a new savings account different from your salary or other accounts. Do not forget to shop around for a product that will attract less monthly charges and earn you interest.”

Experts advise that if you are not disciplined enough, you can have a standing order where a specific amount is sent to this account automatically.

Using this method, you will be surprised to see how your savings can grow to form a formidable emergency fund.

“After some time, it is important to evaluate how you have been performing. This will enable you to decide whether to rethink your strategy or continue saving in the same say,” offers Obura.

As you start building your emergency fund, bear in mind that you must choose wisely where you keep your money. It should be accessible and offer banking flexibility like that offered by mobile phone banking services.

“Although it may take time to build up your fund, you must get started. Evaluate your finances and determine how much you can afford to put away each day, week or month,” she says.

“The idea is to start building your emergency fund today. Saving Sh100 a day can add up to over Sh100,000 in less than three years. Do not wait for tomorrow,” observes Obura.

Savings: How much is enough for kitty?

• It’s best to split your savings – keep some on hand for emergencies and put the rest where it can work for you.

• Keep to what you can afford and make sure to save regularly.

• Just like you would save for a new car, work out how much you need to put aside, and set up a savings standing order for the right amount.

• Once you’ve met your target amount for the emergency fund, you may want to continue with the regular savings amount to fund other goals – you may well be used to this level of outgoings by then.

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