Fabulously Broke: How to build an Emergency Fund.

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“Do not wait until you are broke before you think about how to get rich” – Anonymous

I am definitely not Mark Zuckerberg, neither do I own as much money as Bill Gates. In fact, I place nowhere close to the richest dudes in the world, but hey… I do have enough to spend on shoes, bags, and lots of clothes without any fear of the future.  Isn’t that the true definition of financial independence? Having the money to do what I need to do, when I need to do it and without taking on unnecessary debt. I believe that if it works for me, it most likely will do for you too. After all, what is sauce for the goose is definitely sauce for the gander. I like to be very hopeful.

We all have our dreams and aspirations as well as the image of our expected future but the question remains, “Are we working towards the realization of that dream?” More often than not, people tend to spend most of their day thinking about how to make their lives better rather than actually following their plans and I am no exception. That being said, the first step is to start doing and stop imagining (This reminds me of the definition of a verb). Now, the following steps may leave you financially uncomfortable but promise the achievement of your long-term goal(s). After all, success requires sacrifice.

You may agree with me then that in order to reap the full benefits of an individual, activity or object, you first have to invest in or towards that person or thing. I am more interested in the monetary aspect of it though. I believe that you’ve heard the saying that “money makes the world go round”.

In my opinion, it is advisable to start by building an emergency fund, which is simply an amount of money – usually nothing less than six (6) months of your current salary (consolidated), that is stashed away to cater for the uncertainties of life. This fund, as the name implies, makes it possible to avoid financial situations that may cause you to deviate from your long-term investment plan(s).
Assuming I earn GHS 1,000 monthly, my emergency fund should be at least GHS 6,000 (6* GHS 1,000), so that I can continue living a ‘normal’ life, even in financially difficult times. However, I cannot get that money overnight so I have no other choice than to build my fund over time. This confirms the theory that all capital starts with savings.

I have read from different sources that it is prudent to save at least 40% of your salary and spend the remaining 60%. I have no right to suggest to you, ways of expending the 60% of your salary. However, I can share with you how I utilize the other 40% of mine. Being the Christian that I am, I allocate 10% of my salary to the payment of tithe and 10% each to my savings account, emergency fund and other investments. The savings account is expected to cater for unplanned expenses while the emergency fund takes care of the uncertainties of life and as a back-up to the savings account. Additionally, the investment account is usually for the achievement of long-term specific goals.

Many people are of the view that an emergency fund should be placed in a savings account because of its purpose and for the sake of liquidity. I, on the other hand, do not think that it is the best option. Here’s why:

  1. The money is easily accessible. Let’s consider this situation. I have an ATM card (visa), I’ve been presented with a cheque book, and my account is linked to my mobile money wallet. These days, most shops accept both debit card and mobile money payments. So you tell me, how I can save money with such an account.
  2. I pay GHS100 consistently into my account in the name of saving it for a rainy day. However, the bank debits my account monthly and they call it COT charges.  Besides, anytime I use my ATM card, my account is debited with an additional fee as transaction cost. How does that help me to achieve the goal of building the fund?
  3. Let’s consider the time value of money. It is a known fact that the purchasing power of the cedi today, may not be the same tomorrow. Many savings accounts pay interest that is less than inflation, the actual cost of living. Consequently, the money that you put away every month in a savings account will not achieve its purpose in the future because its value would have depreciated. For example, the cost of a GHS1 pen may appreciate to GHS1.50 in two months as a result of inflation, a theory that the savings account does not thrive on. Besides that, the money may not even stay in your account long enough to earn the full interest. I say this because of point 1. In addition, even if the interest is earned on the account, it is also taxed.

That being said, there are many avenues where one could invest but age is always a critical determinant. From my point of view, young investors should be comfortable with the long-term risky investment – capital market (stocks and equities). As they draw closer to retirement, they should consider short-term low risk investment – money market (Treasury bills) in order to have a regular source of income to take care of expenses after retirement.

There are many people who believe that a dollar investment yields more than that of a cedi. Although this might be true for some, returns on Cedi investments are higher than returns on dollar dominated investments, in that, although the Cedi is bound to depreciate, returns on it is high. However, it is prudent to diversify (Have a little bit of both). Diversification of your investment portfolio is necessary because even if one company collapses, it does not really affect you. The best way to ensure diversification is by buying mutual funds as these ones are invested across companies and industries.

I am confident that after reading all of this, there are some who may feel the need to borrow money for investment purposes. If you are among this few, please note that it is a risky thing to do. Once you borrow money, you are automatically on ‘diet’; you have to reduce your expenditure in order to pay with interest . It is therefore better to do small amounts consistently over a long period of time.

In conclusion, though these steps may leave you financially broke in the short-term, you will realize in the long-term that it was only fabulously so.

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