Often you hear financial planners talk about emergency funds as a means to always be prepared for whatever life throws at us, but what really is it, and how do you go about creating one for yourself?
An emergency fund is intended to give you protection against random incidents that life sometimes sends our way. While we can budget our expected monthly spending to the exact dollar, our budget doesn’t cater for unexpected events very well. If you budgeted $25,000 GYD for transportation in a month, but you get into a car crash, what happens? Suddenly you will have to spend maybe $100,000 GYD on repairs. If your budget is flexible, that might be fine – but for most people, this random expense might be the thing that puts them into debt. This is what an emergency fund seeks to avoid.
Or what if you lose your job completely? What if you can’t find another job for 3 months and you have a family to feed in the meantime? This is something you’d never want to have happen to you, but the fact is – there is a chance it happens.
How to create an emergency fund?
An emergency fund is different for everyone. There is no single dollar amount I can tell you to save for each of your unique cases. You must figure out this dollar amount for yourself. However, I can guide you and give you targets to hit – which is exactly what I will do in this article.
First Step – Create a Budget
You must know what your regular expenses look like before you are able to properly plan for unexpected expenses. Start by just tracking one month of regular expenses – it doesn’t even have to be very precise. Even if you just have a weekly review, ask yourself what did you spend on gas for the week? What about food, rent, internet, phone, water, electricity and entertainment, etc. Once you have these written down, and review it at the end of the month.
Categorize Expenses
In your month end review, label each expense as “survival expenses” or “musts” if it is an expense you’d die or be homeless without. These are things like basic groceries, transportation, rent/mortgage, electricity, water, etc. This will set the stage to be the minimum money you need to simply survive. Next, we categorize expenses as “living expenses” or “needs”. These you can technically live without if “push comes to shove” but you don’t necessarily want to give them up since it’s a part of regular life. These are things like internet bills, data plans, new clothes, gym memberships, “fancier groceries”, etc. This forms the next level of your budget. These are things that add comfort to your life.
The last level of expenses are all the other things that make life worth living. These can be called “non-essential expenses” or “wants”. In this category you’ll place all the things that simply add happiness and fulfillment to your life. This can be going out to parties, eating out, traveling, watching Netflix, buying video games, gifts or fancy clothes, etc. Whatever you love spending your money on can go here.
Next Step – Find out how much you will need
An emergency fund typically consists of 3 – 6 months of your expenses. Now you can think of it three ways.
First way is to accumulate 3 – 6 months of your “survival expenses” so that you can be sure you won’t starve or die if you lost a job. You won’t exactly have a comfortable 3 – 6 months, but at least you won’t die.
The second way is to accumulate 3 – 6 months of your “living expenses” so you can not only stay alive, but live in some sort of comfort if anything bad were to happen. At least you’ll have internet so you can post memes about how your life is falling apart.
The third way is to account for all of your expenses, including all of the fun stuff you do so that if you were to lose your job for 6 months, you can live like it never happened (you shouldn’t – but you can).
Obviously, you can see how it may be much easier to save for survival expenses first if you are starting from zero. So if your monthly survival expenses cost $80,000, you’d need between $240,000 to $480,000 stashed away to meet this requirement.
If you want to at least be comfortable, like most people would – you’ll need to save more. Let’s say to be comfortable you need an additional $40,000 per month, then you’ll need to save between $360,000 to $720,000.
When to use your emergency fund
Now that you have this money, when do you use it? What counts as an emergency? Here’s what I do personally. If something came up randomly that is critical to my survival or well-being, or simply too essential to my life, I count it as an emergency. If I can live without it, it does not qualify as an emergency.
If the air conditioning in my car stops working, it is not an emergency and I am not allowed to touch this money to fix it. If my clothes dryer breaks, I can still hang clothes on the line in the yard – so this does not count. If the washer stops working on the other hand – then fine, I’ll take some money out. If I need new car tyres from regular use, I won’t count it as an emergency. If one of my car tyres has a blowout, then sure. You get the point.
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Where to keep your emergency fund
Ideally you want your emergency fund to be out of reach of you on a regular basis. Make it hard to access, but not too hard so that you may not get it in time for an emergency. That being said, you should keep your emergency fund separate from your day-to-day spending or savings.
So how do you make your emergency fund hard to get to? The best way to do this in Guyana is to put it in a bank account without an ATM card (debit card) if you can. Examples of this are local “bank-like” institutions like Hand in Hand Trust and New Building Society. These tend to use bank books rather than sending you account statements. They do not issue debit cards and do not have an ATM network. You have to physically go into the bank in order to redeem your money usually. These may be perfect walls to protect our emergency fund from ourselves with.
Last time I checked, Hand in Hand Trust also offered a 2% interest rate while NBS offered a 2.75% interest rate which is way more than what traditional banks would offer – so that’s an added bonus.
Now for those of you who have some money sitting around in excess of your emergency fund, I also advise you to put as much as possible into a high interest rate account. The Republic Banks and Demerara Banks usually offer interest rates lower than 0.1% on savings accounts. Your money can be put to better use if you just have it sitting in a traditional bank. However, do not go and “yeet” (throw) all of your money into one bank account. There is a chance that any of the financial institutions go bankrupt, fail and have to be liquidated, meaning your money has a risk of disappearing.
Deposit Insurance
A little known fact about bank accounts in general, is that most countries have something called deposit insurance in place to protect against losing all of your money if a bank goes out of business. This means that the government (Deposit Insurance Corporation specifically) will give you back your money if this was to ever happen. However, they only give you back up to a certain limit. The deposit insurance limit in Guyana is currently 2 million Guyanese dollars per account, per institution. This means that you will get back up to 2 million of your savings, but not more than that.
That being said, if you have more than 2 million in any one bank, split it up into different banks to ensure all of your money is covered by this insurance. Most people will not have more than 2 million in the bank, but I am hoping that by reading these articles – you will soon have more than 2 million (mo money, mo problems).
Here are the banks covered by this deposit insurance.
- Republic Bank (Guyana) Limited
- Guyana Bank for Trade & Industry Limited
- Bank of Nova Scotia (Guyana branch)
- Demerara Bank Limited
- Citizens Bank Guyana Inc.
- Bank of Baroda (Guyana) Inc.
- The New Building Society Limited
- Hand-in-Hand Trust Corporation Inc.
Disclaimer: Please do your own research before you make decisions regarding your money. I am not a financial advisor and this article is simply for educational and entertainment purposes. Never blindly listen to a random guy on the internet.
More on Deposit Insurance
Bank of Guyana has written some articles to break this down in a bit more detail. Here’s a small extract of their article. Click the buttons below to see the full details on their website.
Where not to keep your emergency fund
Do not keep your emergency fund in a regular savings account if you can help it.
Scenario: You have 1 million in an account earning 2%, and you have 1 million in an account earning 0.1%.
At the end of 10 years, in the account with 0.1% interest rate, you’d earn an additional $10,045 GYD. However, in the other account you would have earned $218,994 GYD! These numbers are before taxes and fees, as well as not accounting for inflation – but there’s a clear difference. So just by simply moving your money to a better account, you can be up more than 200k in 10 years on every million just by having it sitting there.
Do not keep it in the stock market
NEVER buy stocks/shares with your emergency fund. Stocks are very volatile and an emergency may pop up when all of your stocks have lost money (unrealized losses) putting you in a very vulnerable position. Do not buy crypto, do not put it into real estate – do not do anything with it. Keep your emergency fund in cash in a bank, and nothing else. To add to how unstable stocks are, Guyanese stocks can take months to buy or sell meaning if your emergency is time sensitive you will be doomed.
Do not have it as a Certificate of Deposit, Bonds or Fixed Deposit
Do not keep your emergency fund in any financial instrument that tends to lock up your money for a fixed period of time. Again, your emergency fund needs to be liquid. If you need it today, ensure you can get it today. Make it hard to access, but not too hard to the point where it becomes useless in times of trouble.
Check to ensure your account has little to no withdrawal limitations based on time and amount. Some institutions like NBS have a slight time limitation. With a Save and Prosper account at NBS, you are required to inform them of a withdrawal one month in advance. If you don’t, a penalty will apply. However, this penalty isn’t that bad. The penalty is that you will simply miss out on the current month’s interest. This is something I believe is reasonable and will not affect you much.
Note: This is by no means an endorsement of any of the institutions listed. I am not affiliated with any one of them for the purpose of promotion, however I do business with them. This is simply my own opinion.
That’s it, you are now protected from most horrible things life may send your way. The next step for you is to get rid of all of your debt before you can start focusing on building your wealth. You are well on your way to becoming financially stable.
