Unexpected financial bills that cannot be catered for by your ordinary monthly budget are one of the threats that can suddenly throw your financial wellbeing in jeopardy. Such bills may result from a car accident with hospital and car repair bills, sudden job loss, urgent foreseeable need to move house etc.
In these pages, I have previously stressed the importance of an emergency fund as the first fall back position to handle such cases. An Emergency Fund is an account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense.
The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to use high interest debt, such as emergency bank loans which will attract an interest, as a last resort.
Most experts argue that three to six months of one’s living expenses should be adequate for an emergency fund.
Money should be easily available if needed but extreme discretion should be exercised before tapping into it i.e. don’t use your emerging fund to fund an unexpected invitation by friends to go for a weekend at Lake Kivu – that is not an emergency.
Secondly, when one can afford, insurance seems expensive but in case of a misfortune which is covered then you realize the importance of being insured. It can be as simple as Mutuelle and as complex as life insurance, but the main idea is that if one can afford a relatively able lifestyle, getting oneself, your family; your property insurance is a good way of cushioning yourself from financial tragedies.
Also, as your savings grow, consider increasing your safety net in the emergency fund, and always replenish it in reasonable time after drawing from it. You should have your own procedures of making sure that emergencies are really emergencies. One of he reasons why most people cannot maintain their emergency fund at the required level is the tendency to dip into it to finance projects and luxury expenses in the false assumption that it is fine as long as they are not touching into their savings.
If you deplete your emergency fund and get a real emergency, then you will have to dip your hand into your savings hence postponing your saving plan to build or buy a house or car.
Resisting the temptation to spend from savings, emergency fund or increase your monthly budget to purchase luxuries is the way to which you will build your financial health steadily to an extent where these luxuries can easily be catered for by your monthly budget.
Hence the principle of delayed gratification; If I don’t spend one thousand francs today, I will have ten thousand francs in five years, but if I spend that one thousand today, I will have nothing in the same period.
Mind you, if you avoid spending one thousand francs today, your life won’t change and yet the same amount can improve your life considerably in five years. But if you choose to spend that one thousand on a small want today, the benefit from that money will end on the same day.
Financial emergencies cannot be completely averted, but when you are ready it is easier to handle them than if you are ill-prepared.