Nobody could’ve predicted what came to the world in 2020. Nobody had time to prepare for the social and economic impact the COVID-19 pandemic would have on the world. Zimbabwe’s case has it’s own idiosyncrasies but without doubt, the lockdown put in place to fight COVID-19 has had effects on incomes and will continue to do so for as long as this lasts. The team here at Startupbiz are great fans of the idea of emergency funds and we have spoken about their creation and constitution on separate occasions. In the wake of the pandemic, let’s see what we have been reminded about the importance of emergency funds.
Why you need one
Emergency funds are of course for unforeseen circumstances. In many cases, they are taught to guide against sudden unemployment or other loss of income. Depending on who you consult you are told to have 3 to 6 months worth of your expenses in cash or cash equivalents saved up. This can be drawn on in the event of an emergency. Of course, the reality is while the COVID-19 pandemic has only been with us for a month according to reports the effects may extend far longer.
A lot of businesses saw a dip in customers long before any lockdowns were put in place. Those workers deemed non-essential and on no work, no pay arrangements, as well as those self-employed people who could not transition to onlin9e work, had their incomes abruptly nipped in the bud. It could get worse though. I’m involved in a business that works completely remotely however many of our clients have had their work affected by lockdowns. Ultimately, our business though adaptable to the situation does not have customers who are. The longer the pandemic progresses even businesses that are savvy and adaptable may have trouble with their clients being forced to stop patronising their businesses.
Based on this no current income is safe in the long run. World over governments have stepped in with packages for businesses and individuals whose incomes stand to be affected. Our government has stepped in with ZWL$200 for vulnerable families. We can argue all the livelong day about whether that is enough or not but what is clear is that it is an attempt to help. Government bailouts are great as an add on to your emergency fund.
But I have irregular income
If this applies to you then you definitely need an emergency fund. Given the large size of Zimbabwe’s informal sector and people involved in micro and small businesses to make ends meet, emergency funds should be taught at creche in Zimbabwe. The irregular income earner needs the emergency fund more than those on regular incomes by far.
How much should I put in an emergency fund?
This matter was addressed before in this article but I cannot complete the discussion without drawing on it. It is about taking a real assessment of your monthly expenditure. Please be advised that sitting down with a pen and pad and listing your expenses will not cut it. I recommend using an expense tracker app for about 3 months to learn your real expenditure. This is an emotionally challenging process as you will learn things about yourself that you may not have wanted to know.
How do I set up an emergency fund?
The concept of paying yourself first by putting aside 10% of your income towards saving and investment comes to play here. Saving comes before investment for a reason. Many want to invest before creating a safety net such as an emergency fund but moments like this will reveal the folly in this practice. For illustrative purposes let’s assume your expenses amount to $100 and your income is $150. The idea is to save 10% of your income, $15 every month until your emergency fund is at $300 (3 months worth of expenses). This would take 20 months to achieve assuming no emergency comes up in the process. 20 months of saving for 3 months of security sounded a bit crazy until COVID-19 hit. 6 months worth of expenses would take you 40 months to save up for. Once your emergency fund is built you can then go on and invest in riskier ventures.
Where do I put the money?
Now, this is the hardest question to answer because it depends on where you are and the obtaining environment. While many books on the subject will tell you to put the money in a savings account or money market instruments in Zimbabwe we have to contend with an inflation rate which at over 500% knocks out any return being offered by such vehicles. Fortunately, one can buy and keep US dollars which are a great saving vehicle as they keep step with inflation and in the long run increase purchasing in Zimbabwe in US dollar terms. I’m sure there are other vehicles out there which can be found through research.
This is something I hope we can learn or learn again through this unprecedented experience for most if not all of us. Whenever this ends our lives will have to go on and I hope this principle will not be forgotten.