Building an emergency fund on a tight budget

In today’s unpredictable world, financial stability is more important than ever. We all remember the COVID pandemic. Building an emergency fund is a vital financial practice but the challenge lies in doing so on a tight budget. Setting aside money when every penny is accounted for can seem overwhelming. The key lies in adopting practical strategies that prioritize saving without overwhelming your finances. These include setting clear goals, creating a budget that you stick to, and making small consistent contributions.

This guide will further explore achieving financial security without compromising your everyday needs.

What is an emergency fund?

An emergency fund is a cash reserve set aside for unexpected expenses or financial emergencies, that can be used for unplanned payments that are not part of your routine monthly spending without debt. It is the money you would fall back on in case you lost your job.

What situations qualify as emergencies?

The whole point is to be able to cover unforeseen situations that require immediate financial attention. These include the following:

1. Sudden unemployment or a significant cut in income. This disrupts your ability to meet basic expenses such as settling your rent or getting utilities.
2. Unexpected medical expenses such as serious illnesses, surgeries, or accidents.
3. Sudden family situations such as the passing of a loved one.
4. Unexpected car repairs or breakdowns
5. Natural disasters including events such as floods and earthquakes, among others.

It is important to also note the difference between an emergency fund and a sinking fund. Emergency funds cater to unplanned expenses, while a sinking fund is used to cater to planned future expenses such as a friend’s wedding. Here is more about a sinking fund and how to create one.

How to build an emergency fund

Now that you know what situations require you to be prepared and alert, let’s look into some of the ways you can build emergency funds.

Set a target

Goal setting is indeed the first step in turning the invisible into the visible. A specific target gives you a clear goal to work towards, making your savings goals more focused and purposeful.

Here is what your target should contain:

1. The Amount: Rather than have a target of “saving more”, your target should have the actual amount you plan on setting aside. For instance, you could have a target such as saving Ksh 10,000 every month.
2. The Time frame: Have a specific period in which you aim to achieve your target. This could either be 6 months or even a year.
3. The Purpose: This will help define what types of expenses your fund is intended to cover. As we looked at earlier, emergencies could be anything from illnesses to even natural disasters. Furthermore, having a purpose ensures your fund is adequate to cover your emergencies.

As you set a target, ensure you take into consideration your wants and needs and any debts you might have. This ensures that your fund is sufficient to cover all your expenses.

Write a budget and stick to it

A budget is a spending plan that takes a comprehensive look at your income and expenses. Writing down this helps you gain a clear picture of your financial situation, including how much is coming in, how much is going out, and where it’s going.

Your money could be leaking out to unnecessary expenses such as spending on take-out meals. Recognizing these patterns allows you to make deliberate changes that allow you to free up your money, directing it towards your savings.

Moreover, a well-structured budget allows you to prioritize savings, treating your emergency fund as a non-negotiable expense. Setting aside the amount targeted ensures the consistent growth of your fund over time.

Start with small but regular contributions

Small regular contributions leverage discipline and consistency, allowing you to save gradually without feeling the strain on your finances. This could look like committing some fixed amount every day or week, depending on what you can afford. This way, you make building your emergency fund goal more manageable.

These may not seem significant at first but they add up over time making your fund grow steadily. Furthermore, making these regular contributions helps you develop a saving habit. Seeing your emergency fund slowly increase provides a psychological boost as you know your small efforts are making a difference.

The practicability of these small regular savings will even allow you to increase the amount contributed to your emergency fund when your income increases.

Also Read: Saccos unveiled: Your Guide to Smarter Savings

Automate your savings deductions

Automating your savings involves transferring your money to your emergency fund as soon as you receive your income. It is an ‘’out of sight out of mind’’ approach that ensures you prioritize saving before spending on other expenses.

When you’re on a tight budget, manual saving could come with some stress due to the numerous financial obligations. Automating your emergency fund deductions can therefore help eliminate this stress and even procrastination.

Where to keep your emergency fund?

There are several options for keeping your emergency cash reserve, which depends on your financial goals, the level of access to your funds, and the safety of your funds.

Some of these include:

1. Bank Savings Account: This is a secure place to keep your emergency fund, allowing you to start with as little as you can. Despite the low interest rates, Co-operative Bank, DTB, and NCBA would be great places to start your emergency fund journey. You can also consider a high yield savings account which basically give higher interest rates than normal savings account, albeit with different terms and usually longer lock in periods.
2. Money Market Funds: These are a type of mutual fund that invests in low-risk short-term financial instruments. They offer a great balance between higher returns and accessibility. You can read more about money market funds here.
3. Savings and Credit Cooperative Organizations: These are member-owned financial institutions that offer savings and credit facilities. These are a perfect avenue if you are looking for higher returns and community-focused banking.
4. Fixed Deposit Accounts: These offer a higher interest rate but require you to lock away your money for a specific period. Despite the immediate access to your funds, it is a great channel to earn more on your savings.

How much should you save in your emergency fund?

Regardless of your circumstances, the recommended guideline is setting aside 6-12 months’ worth of living expenses in your emergency fund.

Here’s how to further determine the right amount for your situation:

• List all your necessary monthly expenses and how much you spend on each. These include rent, grocery shopping, and other essential bills.
• Multiply your total monthly expenses by 6 to get the minimum amount you should aim to save
• Consider additional factors such as if you have dependents that look up to you or if you have a loan you require to service. Ensure to factor these in your emergency fund as they are also essential and need to be catered for.

Importance of building an emergency fund

Is it important for you to build your emergency fund if you already haven’t started? Yes, and here’s why:

1. An emergency fund will provide a financial cushion to cover those unplanned expenses without disrupting your day-to-day financial stability.
2. Your emergency fund will prevent the need for high-interest debts whenever emergencies arise, preserving your financial health.
3. The process of building an emergency fund instills a sense of financial responsibility in the long run.

Go ahead and save for those rainy days

As we’ve seen, building an emergency fund on a tight budget is not as complicated as it might seem at first glance.

By setting specific goals, adhering to a well-structured budget, and committing to regular contributions, you can gradually build a fund that provides peace of mind in times of crisis.

This financial safety net is a crucial resource that will ensure you are prepared when those financial setbacks come knocking.

Start small, stay focused and remember that every little bit adds up in the long run.

You are now ready to face those unexpected challenges with confidence.