Saving money is vital. This is because it provides you with financial security, financial independence and secures you in case of an emergency.
Emergencies are unpredictable by their very nature. They have the potential to disrupt your financial stability if they occur. If you aren't prepared, a sudden illness or accident, an unexpected job loss, or simply an emergency home or automobile maintenance can disrupt your family's day-to-day cash flow.
While emergencies cannot always be avoided, having an emergency fund can help alleviate the financial strain of coping with them.
What is the definition of an emergency fund?
An emergency fund is a savings or bank account set aside to cover or mitigate the costs of an unexpected event. It shouldn't be viewed as a savings account or factored into a long-term plan for college tuition, a new car, or a vacation. Instead, this fund functions as a safety net, to be used only in the event of an emergency.
How much money should you save?
While the size of your emergency fund will vary based on your lifestyle, monthly spending, income, and dependents, the general rule is to set aside three to six months' worth of expenses, but at InvestNaija we advise you to save at least 3 months of your income. This sum may appear intimidating at first, but the goal is to save a tiny bit every week or two to get to that goal. You could want to change the amount based on your bill commitments, family necessities, job security, and other variables.
How to begin investing with little money
What should you do with the cash?
The best location to put emergency funds is in an interest-bearing account, such as a money market fund or an interest-bearing savings account, which may be accessed quickly and without penalty. The risk of putting your emergency savings in illiquid mutual funds, equities, or other assets is that they will lose value if you need the money right away.
Tip:
You should save emergency funds in an account that is quickly accessible so that you don't have to pay early withdrawal fees like you would with a Certificate of Deposit (CD) or a Retirement Savings Account (RSA).
When should you put this money to good use?
The idea is to only use your emergency fund for expenses that are directly related to an emergency. You'll know how much to save by establishing a precise Naira amount that should be in that account. When you need to use your emergency savings, you'll know how much to put into the account to replenish it. It's critical to promptly begin rebuilding this fund if you do need to take money from it.
The Right Mindset for Financial Independence
The most important takeaway:
- Remember that if you begin saving now, the money you save will go a long way towards fulfilling your needs when the next emergency arises.
- Well done! You now know how much money you'll need in case of an emergency. You're gaining ground on your way to living the life of your dreams.
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