COVID-19 and emergency savings fund

The last few weeks have been particularly challenging and eye-opening. Many have faced dire financial situations. Others have come to realize how financially vulnerable they are. Yet, some have been able to ride the storm with more confidence. The Coronavirus lockdown has prevented small business owners and the self-employed from working and earning daily income. Some employees of big businesses have their salaries reduced, were sent on leave-without-pay or had their employments terminated. Even those whose salaries were not reduced, knew that their incomes were seriously at risk as their employers would not continue paying them indefinitely.

So, how did you fare financially under these circumstances? Was your income reduced? If yes, were your savings enough to sustain your lifestyle and living expenses during the lockdown? If the lockdown lasts for six months, would you still survive well? We know it is not only a general lockdown that can prevent us from working and earning an income; illness, labour strikes, force majeure on our employer’s premises etc. can prevent us from working. The two main ways to prepare for such a situation is Insurance and Emergency Fund.

A life insurance policy that pays out a monthly salary when you are unable to work, due to circumstances beyond your control, is a good way to prepare for such a situation.

However, Emergency Savings Funds are the most common way to survive when we face financial emergencies. The rule-of-thumb states that your emergency fund should cover at least six months of your normal living expenses. Many of us have complained that we cannot afford to save, but this lockdown has demonstrated that we cannot afford not to save. Savings via emergency funds are critical in the times we are living in; and any responsible adult with dependents must have one. Calculate your minimum six-month Emergency Fund figure and start saving towards it.

No amount is too small to start. N1, 000 monthly for one year gives you N12, 000 Emergency Fund that you otherwise would not have. But strive to save a minimum of 10 per cent of every inflow–salary, bonuses, monetary gifts, investment income. Start with whatever you can now and increase gradually to 10 per cent and above. Look out for ways to reduce your expenses and increase your savings ratio e.g. packing lunch from home; entertaining guests at home; using energy saving bulbs; using the cheapest telecoms package; carpooling for school pickups etc.

This underscores the importance of recruiting every household member into a financial intelligence mindset. The best way to save monthly is to set up a Standing Order with your bank – once your salary is paid, the savings should be deducted and moved to your savings account before you can access it. For obvious reasons, we should not have ATM cards or e-banking services for savings accounts. The Ajo/Esusu savings method is also a highly effective savings strategy, so long as we have a good hold on every group member (e.g. all members work in the same organization) and the money collected is used for investment and not consumption.

We all know it is financially naive to keep six months living expenses in low yielding savings accounts; we must invest them in higher yielding assets. However, because the money is an emergency fund, it should not be invested in illiquid (difficult to convert to cash) assets like real estate. The fund should be in cash or near-cash assets like fixed deposits, treasury bills, commercial papers, money market mutual funds or bonds which can easily be liquidated and converted into cash as soon as you need it. Therefore, you should instruct your bank to transfer your savings balance to the preferred investment vehicle whenever the balance reaches a predetermined threshold. Re-investing 100 per cent of the interest earned back into the assets accelerates the achievement of the emergency fund target figure. Ensure you do your due diligence on any asset you are investing in. Every asset in your Emergency Fund must be easy and quick to sell and convert to cash, so you would not be stranded when an emergency happens and the whole purpose is defeated.

It is common to use part of your Emergency (Six-Month Living) Fund for other unforeseen circumstances. The most important thing is to return the money to the fund as soon as possible, by increasing your monthly savings for a short while, if necessary.

Emergencies not only affect present circumstances; they threaten future well-being if not properly managed. Arming ourselves with an emergency fund would make life’s emergencies easier to navigate. Let us be prepared. Happy investing.

 

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