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How to Build an Emergency Fund East Africa

Building an emergency fund is a helpful method for saving for the unexpected. Learn how to build an emergency fund in this article.

How to build an emergency fund steps:

1. determine how much money you need for six months’ worth of expenses

2. find the most profitable home for your emergency fund

3. open the account

4. make your initial deposit

5. Save regularly

What is an Emergency Fund?

It is an emergency saving.

An emergency fund is a savings account you can use in emergencies. It is usually best to have an emergency fund with enough money to cover at least six months of living expenses.

If you lose your job or experience a medical emergency, you can cover your living costs without having to borrow money from others and get into debt.

“An emergency fund is a cash reserve specifically set aside for unplanned expenses or financial emergencies.” https://www.consumerfinance.gov/an-essential-guide-to-building-an-emergency-fund/

Take away point:

An emergency fund is a collection of money you can use in an emergency. It is a safety net for unforeseen events, e.g., the coronavirus.

emergency fund infographic - How to build an emergency fund
emergency fund infographic

How large should your emergence fund be?

Your emergence fund should at least cover your standard of living for at least six monyhs. But, you should grow your emergence fund to cover and protect your standard of living for up to 5 years. 

Why?

The recommended minimum of six months is a brief period and therefore risky. If a situation like a coronavirus could cause up to twelve months of an economic shutdown, is an emergency fund for six months realistic?

What is the Purpose of an Emergency Fund?

The purpose of an emergency fund is to provide a cushion during an unexpected situation. When it comes to emergencies, there are many different types, and they can happen at any time without warning.

That’s why it’s essential to have some money saved up in case one occurs.

What is the importance of an Emergency Fund?

An emergency fund is crucial because it helps you get back on your feet when unexpected events happen. It can be anything from car repairs, medical bills, or sudden job loss.

You don’t want to be in a position where you have to borrow money, which will worsen your financial situation.

In addition, it gives you the financial freedom to do what you need to do without worrying about how you will afford it.

A contingency fund is crucial because it removes financial stress and provides peace of mind when facing difficult situations like sudden and unforeseen loss of income.

Take away point:

An emergency fund is crucial because it gives you peace of mind, knowing you’ll have money to fall back on if something wrong happens.

How Much Does it Cost to Start an emergency fund?

You must open a savings account to start and build an emergency fund. The three things you require to fulfill this financial goal are:

a) your time

b) savings account opening balance

c) transaction fees

a) Your time

You must open a savings account online or at your bank’s branch. It will cost you time and energy.

b) savings account opening balance

Most banks will require a savings account opening balance.

For example, Kenya Commercial Bank’s Simba savings account requires a minimum of 1,000 Kenya shillings opening deposit.

c) transaction fees

Most banks charge transaction fees, especially when you withdraw or request a bank statement.

How to Build an Emergency Fund Steps

1. determine how much money you need for six months’ worth of expenses

2. find the most profitable home for your emergency fund

3. open the account

4. make your initial deposit

5. Save regularly

1. Determine how much money you need for six months’ worth of expenses

Calculate your monthly payments and multiply the result by six. 

How?

Make a list of recurring bills such as rent, electricity, water, insurance, etc. How much do foodstuffs cost you monthly? Factor in the loans you are servicing too.

Add all the expenses, and you will arrive at the correct figure. For example, let us say the dollar amount of your monthly payments is 500.

How much is your six-month emergency fund worth?

You multiply $500 by six, which is equal to $3,000

Therefore, your emergency fund needs $3,000 in it as soon as possible.

2. Find the most profitable home for your emergency fund

Your money should make money for you regardless of whether it is in an emergency fund account. 

Which are the most profitable places to keep your emergency fund?

a) High-yield bank accounts

High-yield bank accounts are a great place to keep your emergency fund because they offer the best interest rates and are FDIC insured.

In Kenya, you have two banks, Family bank and KCB, offering up to 7% interest rates savings accounts.

b) Money market accounts

The money market fund is a mutual fund that invests in short-term debt securities. It is the safest place to keep your emergency fund. Money market accounts are FDIC insured and offer a higher interest rate than traditional savings accounts. 

Money market funds in Kenya you could keep your emergency fund are:

  • Zimele money market fund
  • CIC money market fund
  • Britam money market fund

c) Certificates of deposit

 Certificates of deposit are a type of investment that banks and other financial institutions offer. They are also known as CDs.

CDs are a type of savings account that pays higher interest rates than regular savings accounts. The interest rates on CDs can vary depending on the time you invest in them.

The longer the CD term, the higher the interest rate will be. This is because banks want to ensure they get their money back when you cash out your CD after it matures.

Kenya Commercial Bank (KCB) has the highest fixed deposit interest rates in Kenya and East Africa.

Caveat:

Certificates of deposit are good as long as you don’t withdraw before the maturity date or you lose earned interest.

3. Open the account

The next step is to open an emergency fund account at your chosen place. It is either at a bank or a money market fund.

4. Make your initial deposit

Now that you have opened a saving account for your emergency fund, it’s time to put down your initial deposit. It could mean the minimum account opening balance per bank rules or a lumpsum warranty by you.

That action gets you on the way to contingency fund building.

5. Save regularly to achieve your goal

The goal is to save $3,000 as soon as possible. That is the amount you need your emergency fund to reach in the short term.

Find creative ways to save money because you have a project at hand.

How do you save for an emergency fund?

a) save small amounts

The best way to save for an emergency fund is to start small. Saving a little bit of money every day or week will add up over time, and you’ll be surprised how quickly you can build up your emergency fund.

b) Make automated deposits to your emergency fund

The first step would be automatically transferring your checking account to your emergency fund savings account. You can do this by setting up a recurring transfer on your bank’s website or by downloading the bank’s app and setting it up there.

The second step would be setting up an automatic paycheck deposit into the same savings account. It will ensure that you are saving without even thinking about it!

c) Start a side hustle to increase income

The best way to save for an emergency fund is by starting a side hustle.

A side hustle is an additional job or business that you do on the side of your primary job. It can be anything from freelance writing, tutoring, babysitting, dog walking, etc. 

d) Cut your expenses where possible

Cut back on unnecessary spending to save more money for your emergency fund. For example, you might be able to cut back on things like eating out, going out with friends, or buying clothes.

Conclusion: How to Build an Emergency Fund

This article concludes that it is vital to have an emergency fund. This fund should be enough to cover at least six months of living expenses.

The first step in creating an emergency fund is to figure out how much money you need for your emergency fund. The second step is to start saving up for your emergency fund by setting aside a certain amount each month.

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Reference:

Starting an emergency fund

Guide on contigency fund