Emergency Fund

photo adopted from: unsplash.com

I used to wonder how wealthy people could maintain the same standard of living year in and year out, even when the news told us that that person's economic life was crumbling. Somehow they managed to live the same kind of life they had always lived.

I went to school with the daughters and sons of  some of these wealthy people, but whether they left office or went out of business, they still managed to pay up the school fees fully and on time, not to mention that their children's buys still overflowed at the school canteen. Their season(s) of economic struggle didn't seem to ever reflect in their lives, at least not in their children's lives.

When I met the concept of Emergency Fund, I immediately knew that this had to be the trick. It was the magic that helped wealthy people to maintain the same standard of living even during their downtime as they figured out how to get back on their feet. I met this amazing concept in Dave Ramesy's book: Total Money Makeover.

What is an emergency fund?

This is a sum of money worth 3-6 months of your monthly expenses set aside for a rainy day.

That is: if your total monthly expenses are let's say Ushs.300,000  and you chose your emergency fund to cover only 3 months, then you will save up Ushs. 900,000 (Espenses  x  Number of Months, thus 300,000  x  3). 

You don't need to save it up all at once, you can choose to save 10% of your monthly income (you live on the 80% after removing the tithe) until you eventually amount to the total of your emergency fund.

The logic is, in case you are faced with a financial crisis, let's say you lose your job, go out of business, or you make a bad deal, or you're faced with a mandatory lockdown (which I pray never happens) you can continue to live your life as though nothing ever happened for about 3-6 months, as you figure out a way forward.

About three months after I had started living on a budget and had set aside my emergency fund worth 3 months of expenses, I was laid off from my job. I can still remember the peace I had, knowing that I could sufficiently take care of my expenses for the next three months with no fuss. The most interesting thing was that the emergency fund that I intended for 3 months was able to sufficiently cover my expenses for about six months. 

I was able to go about my life as before as I ran after other things. Unless I told you, you wouldn't tell that I didn't have an income, even five months after leaving work. 

Isn't planning for rainy days lack of faith in God?

You may ask. But to the contrary, I actually don't think so, just like wearing a mask during these days of Covid-19 isn't lack of faith in God. I believe planning for a rainy day is good stewardship of what God has given you today. This reminds me of that time when Joseph interpreted the king's dream in Genesis 41.

   "They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. 

This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine."

-Genesis 41:35-36 

Likewise, with the emergency fund, you save up in your times of abundance for the times of scarcity.

Another person may say, "Prepare for darkness while still in the day light."

What if the times of financial crisis never come?

Well, in case you never face times of financial crisis, then thanks be to God, you still have your money growing at a fair rate.

Note:- It is not advisable to buy property or keep your emergency fund in investments where you cannot easily get it.

-It is not advisable to keep your money in a savings account, because the interest you will receive for your money is lower than that at which that money loses value.

- It is more advisable to keep your money in money market products or other financial products, which allow you to get your money on short time notice.

Opening up these money market accounts is as easy as opening up any other account in Uganda and you can deposit money from as low as Ushs.100,000. You can also decide to deposit a one-off or keep depositing on a monthly basis.

I have a good experience with ICEA LION Asset Management Company; they are really amazing, although Prudential Insurance Company and Stanlib Capital Markets Company in Uganda also have some amazing offers.

Seriously, why don't I just invest my money?

Well, it's really up to you, because then, in case of a financial crisis you will have to bare double stress. That is: looking for your next meal, your transport fare, and a solution to your financial calamity at the same time trying to cop with the many other disappointments that come with calamity.

The emergency fund helps reduce stress in case of such a misfortune; you can afford food, transport, rent, for three months while you focus on finding a long term solution to your finances.

Again with proper budgeting, you only spend a percentage of your income which makes 3-6 months in an emergency fund, not tempting enough for a really juicy investment. 

With a proper or visionary budget, you can save up your emergency fund and then save up money for investing.

Many people would have had a more relaxed Covid-19 lockdown season if they had an emergency fund saved up for times of financial crisis, especially our brothers and sisters who have unfortunately lost their jobs or have been focused to spend their business capital on food and other necessities.

Those who do not learn from history are doomed to repeat it.

-Anonymous

As usual, it's always a blessing to share with you, and even more of a blessing when we interact about these weekly topics.

God bless you.