Throughout my adult years, the importance of having an emergency fund had often been overlooked by me. However, the COVID-19 pandemic served as a wake-up call – revealing the vulnerability of individuals without a financial safety net. Witnessing the devastating impact of job losses and income instability on those close to me was a profound moment of realisation. It became evident that having an emergency fund is not only prudent, but essential for navigating uncertain times.
Recently, the Ghana Earnings and Savings Survey (GESS 1) conducted by a financial analyst, Jerome Kuseh, shed light on the alarming state of savings among working people in Ghana. The survey found that a staggering 52% of respondents had less than GH¢10,000 in cumulative savings, excluding physical assets. In addition, the survey also found that 70% of respondents had less than 3 months of expenditure saved up. This revelation emphasises the need to revisit basic principles of personal finance and prioritise the establishment of emergency funds.
In response to this financial crisis, I launched the Emergency Fund Challenge earlier this year. The challenge aimed to motivate individuals to begin building a basic emergency fund, with a target of GH¢5,000 to be achieved by June 2023 and further to GH¢10,000 by December 2023. However, some critics argued that inflation rendered such efforts futile. Nevertheless, I posed a simple question to counter their scepticism: Would you rather have GH¢5,000 by June, even if its real value depreciates, or would you prefer having nothing at all?
I am pleased to report that the challenge exceeded expectations, with some participants reaching the target within just two months and subsequently continuing to build substantial emergency funds. The success of this initiative demonstrates the tangible impact of focusing on emergency preparedness.
For those unfamiliar with the concept, an emergency fund is a dedicated pool of money set aside in an accessible account, and capable of sustaining at least three to six months of one’s current lifestyle in the event of income loss.
The importance of having an emergency fund cannot be overstated. It serves as a lifeline during unforeseen circumstances, providing peace of mind and security. Life presents us with unexpected events, such as medical emergencies, job loss or sudden repairs, and having a financial cushion ensures that these situations do not derail our long-term financial goals. With an emergency fund in place, individuals gain the flexibility to navigate challenges, seek new opportunities, and safeguard their financial well-being.
How much is enough?
Determining the appropriate amount for an emergency fund is subjective, and depends on individual circumstances. Factors such as job stability, industry volatility and household income all play a role in determining the ideal buffer. However, financial experts generally recommend saving at least three to six months’ worth of one’s monthly expenses. For instance, if monthly expenses amount to GH¢5,000, it is advisable to aim for a minimum emergency fund of GH¢15,000. Given the economic fluctuations in Ghana, maintaining a buffer equivalent to six months’ expenses is personally recommended.
Where should one keep their emergency fund?
Striking a balance between accessibility and growth is crucial. Emergencies arise unexpectedly, necessitating the funds to be held in accessible accounts such as high-yield savings accounts or highly liquid investment accounts. Depending on the fund’s size, individuals may choose to keep a portion in a savings account with 24/7 access and allocate another portion to low-risk, liquid investments like Treasury bills or money market funds. Accessibility and safety are the key factors to consider when making these decisions.
In conclusion, building and maintaining an emergency fund is an essential component of personal financial planning. The COVID-19 pandemic has brought to light the importance of being financially prepared for unexpected circumstances. By prioritising the establishment of emergency funds, individuals can protect themselves against unforeseen hardships and pave the way for a more secure and stable financial future. Let us embrace the challenge and work together to ensure a resilient and prosperous tomorrow.
The writer is an Investment Professional (Temple Investments Limited) and a Certified Financial Education Instructor. She is the founder of a financial literacy platform on Instagram; Investment_Friend. Connect with her on Instagram on @investment_friend and on LinkedIn @Seyram Ofori-Atta.
