“It wasn’t raining when Noah built the ark”- Howard Ruff.
Do you know why some people can seize the day and you haven’t been able to? It’s because they have paid the price for that freedom. Have you?
An emergency fund is simply money you set aside to bail you out on the rainy days. it needs to be built, preferably customised to your specific needs. It goes beyond just dividing your inflows and putting it somewhere, anywhere.
Noah didn’t build the ark when it started raining so it matters more what you do to prepare yourself than when it has already happened. It might be too late. What are the three things you should know to build your emergency fund.
1. If you lost your income suddenly, how long will what’s left last you with your spending needs?
At REACH, we call this your Sustenance Score. It is a calculation that factors in your income and amount you spend monthly to give you the total amount of time in months that you can stay afloat without income. During this time, you are typically looking for a new job or finding other ways to increase your cash flow. You can increase your score by reducing and optimising your expenses during this period – It’s called stretching because as we like to say, money is elastic.
Do you want to get the calculations done automatically? Go here.
2. How much risk are you willing to stomach to use what’s left to make more money?
Another way to increase your score, is to increase your liquid assets. Liquid assets include cash in the bank, money market funds, T-bills, and anything that constitutes readily available cash. What this does is that it almost immediately increases your liquid net worth, allowing you to have more cash to spend in the future.
With what’s available to you in case of emergency, you can find low-risk investments to help you earn an interest on your emergency fund. Remember, low risk investments don’t have the highest interest rates. Nonetheless, they can help you make money passively.
To start your Emergency Fund, we recommend Money Market Funds because this way, you can make good interest on what you save, and liquidate it in 24 hours. To start your emergency fund, create a goal here.
3. How much should be enough for an emergency fund?
The team at REACH spent over a year, building Smart Budgets. What this tool does is that it gives you a recommended budget for each type of spending that you typically have. It mirrors your budget to your income and your lifestyle so that yours is unique to you.
Every month, Smart Budgets will tell you how much you should save toward a specific category so that no matter how small you think your income is, you still have your emergency fund. Find out how much you should set aside here.
All the links listed in the article lead to different tools in the REACH app. The REACH app is a personal finance service that people use to master their finances. Download and explore it here
There are no hacks or shortcuts to emergency planning. It takes real work, diligence and focus. Get rich quick schemes are engineered systems. Chances are you will be unlucky more times than you win. Don’t leave things to chance.