Friday, November 25, 2011

THE ZERO EMERGENCY FUND

The conventional financial advice is that if you are employed or earning some income you need to put aside some cash for emergencies; for example loss a job, medical emergency etc. Personal finance experts advice that you keep 3 months to 6 months equivalent of monthly liabilities if form of cash.
While it a good idea to set aside some cash for a rainy day, the whole idea of holding such cash needs to be rethought. Failure to have such amount of cash saved does not necessarily constitute a crisis. So if you haven’t, don’t worry too much because what really matters is your overall financial flexibility, that is; resources you can command too help you withstand a crises, however unexpected, severe or long lasting for the following reasons.

1. Emergency funds take time to accumulate

With the tough economic conditions especially the biting inflation, household budgets are becoming tighter and tighter. With the numerous financial obligation and spiraling costs saving even a small amount is becoming a challenge and thus an emergency fund is hardly a priority. If at all you manage to save anything at all, it will be minute and will take you ages to actually save 6 months worth of living expenses cash.

2. Unacceptably high opportunity cost of funds

Like mentioned above, your budget will have some priorities which are important for your overall financial well being. Items such as debt repayment, retirement saving, sacco savings and investment in a income generating venture will definitely have a higher priority than putting aside an emergency fund. Basically, you have more to gain from making such investments than having money sit around.

3. Non emergencies become emergencies

With idle cash in the bank, issues which you would not ordinarily consider emergency will become emergencies. For example when your idiot brother gets arrested and people look up to you to bail him out, if you don’t have money you will state that fact and suggest creative ways of raising the money. With idle cash lying in the bank creativity will feature less and you will just want to get on with your life. Of course your brother will never pay you back.

Emergencies and financial crises can be managed by first having access to a credit line. That means you have a good financial reputation and you have been paying your debts promptly, be it to your friends, family or even financial institutions. Another way of dealing with emergencies is to liquidate some assets you may have invested in such as real estate or sacco savings. Yet another way to manage emergencies is by risk transfer which is basically use of insurance. Personal accident, comprehensive car cover, fire and burglary and especially medical insurance for your family can help you ride some of the difficult times.

Therefore if you have the above mentioned basics in place and a zero emergency fund, you can sleep easy despite what the experts insist.

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