A Complete Guide On Emergency Fund For Christian Millennials.

Estimated reading time: 9 minutes

Have you ever had those unexpected expenses that are annoying and seem to come at the worst possible time? Do you wish you could have a way to plan for those unforeseen events to ensure that you don’t get dragged ten steps back when it seems like you have had a hang of your finances? Well today, I would like us to talk about everything emergency fund. Without further ado, let’s get right into it,

• Definition of an emergency fund.
• Why is an emergency fund beneficial?
• Factors to consider before setting up an emergency fund.
• How to set up an emergency fund.
  • Set a goal.
  • Set up a budget and stick to it.
    • Practical example:
  • Create a separate account for the accumulation.
  • Don’t over-save
• Conclusion

Definition of an emergency fund.

An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Another definition is spare cash that is used during personal financial distress. Basically, an emergency fund is used to cover the unforeseen, unexpected, and urgent financial situations.

Some personal financial distress includes:

• Car repairs
• Loss of income
• Home repairs
• Replacing a lost or broken cell-phone
• Medical emergencies
• Recession
• Accidents

For having an emergency fund, it is important to note that you can only use it in the event of a serious situation like a real emergency and not on dates, a sale, or a retreat. (They don’t count)

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The primary benefit of having an emergency fund is that it will cushion you in the event of unplanned financial distress such as a loss of job. When you have an emergency fund you will be able to cover your monthly expenses as you figure out your next step.

When you don’t have an emergency fund, a simple financial- shock could set you back in such a way that it would take you months to recover. Also, without an emergency fund, unexpected financial obligations could lead to your borrowing, which leads you to more debt and risk of bankruptcy. Emergency funds help you protect your personal finances.

Why is an emergency fund beneficial?

• Having an emergency fund will reduce your stress level. And just to give you a picture. Imagine having in your emergency fund finances to cover 6 months of your monthly expenses. Wouldn’t that give you some sense of security? Without an emergency fund, you would be so stressed when faced with an emergency.
• When you have an emergency fund you will develop a saving habit that helps you reduce the habit of spending on frivolous things. Emergency funds help you build a strong saving culture.
• You will reduce bad debts (those with very high-interest rates) when you have an emergency fund since it will cover unexpected expenses leaving you with no need to borrow.

Factors to consider before setting up an emergency fund.

The nature of your job or a business venture should be factored in place to ensure you make the right decision for you. A salaried person will not save the same amount as an entrepreneur. And also someone with a new business venture will not save the same amount as one within an established business. For a salaried person, saving six to nine months of their monthly expenses would be ideal while for entrepreneurs at least a year of your monthly expenses should be ideal. Ideally, if your business venture is a start-up and risky you could even go a notch higher and save at least 18 months of your monthly expenses. It would be important to seek professional help if you are unsure of the amount you should be saving based on your unique situation.

Considering the number of dependents and their ages would be something to consider as well. If your parents depend on you, it would be best to save more. Considering that with age comes some unavoidable diseases, it would be best to factor that in. Also the more dependents, the more money you need to be saved up in your emergency fund.

What kind of emergencies do you experience the most? Answering this question will help you know the amount you need to set up in the event of an emergency. The goal of the emergency fund is to prevent you from relying on debt to cover your emergencies.

Where you will put your emergency fund is also something you should factor in before setting up your emergency fund. Will it be in a high-interest savings account, an online bank, or a prepaid card? Asking yourself these questions will help you set up your emergency fund correctly.

How to set up an emergency fund.

Set a goal.

The best way to accomplish something is by setting a goal. And remember a goal always has an expiration date. So as you set it up remember to have an end date in mind. By what month will you have accomplished the said goal of having a fully funded emergency fund? And how much will you have saved by then? Setting a goal will help you look at how you are going to achieve the goal which brings me to my next point.

Set up a budget and stick to it.

Having a budget will help keep you on track. And usually the 50/20/30 rule will help you know how to manage your finances. This in turn will help you know the amount you are capable of putting aside to fund your emergency fund.

The 50/30/20 rule simply guides you on how to spend your income. 50% of your income should be spent on your obligations and needs. These are those expenses you cannot avoid if you want to have peace of mind. 30% goes to your wants. These are expenses that you could do without but enjoy doing. And 20% should go into your savings.

With that being said, since the goal is to set up an emergency fund and fast at that you might consider reducing your wants from 30% to 15% and funneling the 20% of your savings into the emergency fund until you achieve your goal before moving to the next saving goal.

Practical example:

Let’s say your monthly income is $3000.

Expenses- 50% of the 3000 = 1500

Wants- 30% of the 3000 = 900

and Savings – 20% of 3000 = 600

This totals 3000. Now, since your goal is to set up the emergency fund fully funded emergency fund considering the 6-month rule means 1500*6=9000.

Therefore, if you decide to channel 20% of the 30% (wants) of your income to the emergency fund instead, then 20% of 3000= 600 and the entire monthly savings of 600, it means you will save $1200 every month on your emergency fund. To know the period it will take you to fully set up your emergency fund you simply divide. Therefore 9000/1200= 8 months.

It will take you 8 months, saving $1200/ month to fully set up your emergency fund.

N.B This means you will have only $300/month to spend on your wants and $0 to put on your other savings account.

One thing you should note is that it is imperative that you use what works for you. You could decide to use only 10% of your wants money and use $300 on your savings money to fund the emergency fund. Simply play around with the figures and find what works best for your specific need. Another thing you should note also is that this applies to those with a consistent, regular income.

If your expenses make up more than 50% of your income, you should consider cutting back on your expenses. And the best way to do so is to look at things that you don’t always use. Something like a subscription fee. You see these small expenses add up real quick. Remember, you are on a mission to set yourself up for the future and go on to do other things. After all, how can you invest when you don’t even have an emergency fund? And what would be the benefit of investing if, in the event of an emergency, you will end up borrowing therefore taking you several steps back? Using wisdom and prudence is key.

Be consistent and celebrate the progress. To ensure consistency, you should consider setting up automatic payments. Celebrating your progress will give you the motivation you need to keep going. Having an accountability partner could also help you stick to that goal. Exercising self-control and practicing delayed gratification will get you closer to your goal in no time.

Create a separate account for the accumulation.

You cannot put your emergency fund money in your normal savings account, you will end up using it on what it was not intended for. And it also beats the purpose of having one anyway. Instead, open another account. And as you do that remember that you should open an account that you can easily access, and ensure that it is liquid so that you can access it very quickly when you need it. Remember that the goal of the emergency fund is to ensure that you don’t get into debt in the event of financial distress.

And if you are wondering what account to open for your emergency fund, here are some suggestions:

Short-term fixed deposits: If you are worried about spending the money saved in a savings account, you could open short-term fixed deposits with your bank. When choosing this option, it would be useful to understand the terms and conditions before opening a deposit account. 

Liquid mutual funds: Liquid mutual funds fall in the category of debt mutual funds. These funds invest in short-term fixed-income securities like Certificates of Deposits, and Term Bills, among others. Liquid funds offer a slightly higher return than fixed deposits and are more liquid. Lower minimum investment criteria is another positive factor.

High-yield savings: This is a type of savings account that typically pays 20 to 25 times the national average of a standard savings account. This goes to show you that the returns are higher than the normal savings account. It is important to ensure that you find out the minimum balance, withdrawal fees, how easy it is for you, how fast you can access the funds, the safety and security of your funds as well as the required initial deposit. (You can read more about this on Investopedia)

Don’t over-save

An emergency fund aims to help you cover unexpected expenses. You should not over-save in this fund as this takes away from money you could use in investment and making other financial decisions that could better your future like upskilling. Once you have covered 6 months of your expenses, move on to the next goal. Remember, there is retirement looming as well as other obligations the older you get. So don’t stay stuck with funding your emergency fund that you never move on to other financial goals. The ultimate flex is to have your money work for you and not the other way around.

As you fund your emergency fund you are also foregoing something else. This is called opportunity cost. We all know that investments yield better returns than savings. Therefore, once you have finished saving, go to the next.

Conclusion

Having an emergency fund is imperative, especially in this age we live in. After 2020, we all learned that things do happen and it is important to prepare for the unexpected. But I also don’t want you to stay stuck in fear. After all, God has not given you a spirit of fear, but of power, love and sound mind. And if you are battling fear, then you should allow the perfect love of God to permeate your entire being as perfect love casts out fear. When your trust is in God, you can be sure that He will take care of you as He will uphold you. (Psalms 126)

Use wisdom and have an emergency fund. But don’t postpone your life forever in the fear of what-ifs. God has already gone in your future and as long as you follow these biblical financial truths, learn the principles of financial management, and manage your finances effectively, you have nothing to worry about.

Hope this helps you desire to set up an emergency fund and also opened your eyes on how to do it, its importance, and where to do it. You can share your thoughts in the comments below, I would love to hear your views too. Until next time, be blessed.