| An emergency fund is a fundamental part of any | | | | offer 24-hour access, they are a good trade-off |
| sound financial plan. Its primary role would be to | | | | between solvency and accumulation. It is |
| act as a buffer in times of financial despair or | | | | important that your fund keeps pace with your |
| crisis. Examples of such crises include structural | | | | salary and the fair returns from a MMF would |
| unemployment and unforeseen critical expenses. | | | | assist with that. Depending on your salary |
| For some people, emergency funds are used to | | | | increase, it may be necessary to make occasional |
| partially or fully self-insure. This is usually not by | | | | contributions to your emergency fund to maintain |
| conscious decision, but arises through their | | | | it.iii) How to develop your emergency funds |
| unwillingness or inability to finance other protection | | | | It is not expected that you would have six |
| products.i) How large should it be? | | | | months salary readily available to deposit into a |
| The recommendation for emergency funds is 3 | | | | MMF or savings account. You may have to |
| to 6 times your monthly salary. Six times your | | | | gradually develop your fund by making regular |
| monthly salary is highly recommended. More is not | | | | deposits until the threshold is reached. The value |
| necessarily better with this reserve fund. There | | | | of your E.F. should be your target and you could |
| are exceptions however. For those who do not | | | | use a financial calculator to determine what |
| have access to health insurance for medical | | | | payments you need to make to develop your |
| reasons, self-insurance is compulsory. In that case, | | | | fund. The time period in which you develop it |
| the E.F. should be at least two times your annual | | | | should not exceed two years. |
| salary. Other than extenuating circumstances, this | | | | Not having an E.F. can cripple your plan. Without it, |
| reserve should not be used to cover insurable | | | | you may be forced to surrender annuities or |
| risks.ii) Where the E.F.should be kept | | | | other long-term investments. Having too large an |
| An emergency fund must be in a fund or account | | | | emergency fund is also financially debilitating. |
| that is highly solvent. This means that the fund | | | | There was an instance where someone kept a |
| could be accessed on demand and liquidated easily. | | | | fund worth $300,000.00 to guard against risks and |
| A 24-hour access savings account with a | | | | emergencies. This was kept in a money market |
| commercial bank is a suitable place for this fund. | | | | fund at 5.5%. The better course would have been |
| A savings account would be the most solvent of | | | | to acquire health insurance for the family and |
| all savings plans. Fixed deposits and CDs are far | | | | invest the majority of the fund in a high-yield CD |
| from ideal emergency fund vehicles. Money | | | | or mutual fund. Maintaining an E.F. is only effective |
| market funds generally have high solvency and | | | | in the context of other protection products and |
| offer better rates of return. | | | | holistic financial planning. |
| Even though money market funds (MMF) do not | | | | |