It is the right time to do an emergency fund check-up. Let’s begin the year with healthy financial habits that will compound and translate to financial empowerment to meet life’s financial uncertainties.

Please remember that a financial plan is incomplete without an emergency fund. But what is an emergency fund? Simply put, it’s money saved for unexpected or unplanned expenses such as car and home repairs, job losses, and medical bills. These expenses may be large or small unexpected bills and not the usual monthly expenses.

The absence of an emergency fund can cause financial setbacks when an unforeseen event occurs. This may result in indebtedness with a lasting impact. A financial setback can suddenly exhaust savings. Some persons face a further dilemma as they resort to credit cards or high-interest loans to cover unexpected expenses. These debts may prove costly to be repaid. This scenario also makes it very difficult to build an emergency fund while contending with increasing debts. It’s worthwhile to note that the initial cost of the emergency may grow larger with the high-interest charges and fees from credit cards and loans. Ideally, your emergency fund should be invested at compound interest, as your money grows at a faster rate than simple interest and you will achieve your financial goal faster. Compound interest works favourably for the creditors and the credit card companies or issuers, but can hurt the standard of living and finances of the debtor. A credit card is not an emergency fund. Your credit card is a liability, an emergency fund is an asset. Compound interest can work for the debtor or the saver who decides to build an emergency fund.

Individuals do not have enough funds to cover unexpected or unplanned expenses and depend on credit cards and loans to bridge the financial gap.

In Jamaica, we are experiencing high inflation and high interest rates. This means borrowing has become more expensive. But the scenario presents an opportunity to build an emergency fund that offers higher yields on your savings. Emergency funds should not be invested in the stock market as short-term volatility can be detrimental when the saver experiences a major unexpected expense. I recommend that your emergency fund should be in a high-yield savings account, that is not too easy to access. This means avoiding debit card access as there may be the urge to spend unnecessarily. However, ease of access should be a priority with emergency funds as cash needs to be available rather quickly when unplanned or unexpected needs arise. It’s best to keep your emergency fund in a separate account from your regular savings account.

Consider your emergency fund as a safety net that is needed to cope with life’s unexpected or untimely expenses. In life, emergencies can happen at any time, but we don’t know when and how often they will occur. This is the reason we must prepare. Having an emergency fund or money in the bank gives peace of mind during challenging times.

For persons who are living pay cheque to pay cheque, an unexpected expense can prove devastating without a safety net and derail retirement planning and other monthly financial obligations. People who are saving for retirement should ensure that an emergency fund is in place, as emergencies are inevitable. Liquidity is important since in Jamaica you cannot withdraw funds from your pension account to cover emergencies when they arise. Likewise, the mortgage obligation does not cease and resume after the emergency has passed. The financial obligation remains regardless of any emergency. If for any reason funds are insufficient to pay monthly obligations the emergency funds can be used to make important bill payments such as a mortgage, life insurance, car payments, and utility bills.

It’s widely recommended that the size of your emergency fund should be at least three to six months of your monthly expenses. Retirees, meanwhile, may need a bigger pool of emergency funds. I advise that the size of an emergency fund should be dependent on the saver’s unique situation. Set a realistic goal that takes into consideration past financial experience, and your current financial obligations, and assess as to whether your emergency fund goal should be three months or even a year of monthly expenses. Based on your goal, decide how much you can save monthly for your emergency fund. You can start small. Automate your savings through salary deductions, standing orders, or online transfers, and make regular contributions, preferably monthly. This aids the compounding of your savings. It’s also advisable to increase contributions to your emergency funds whenever you receive lump sums, tax refunds, commissions, or financial windfalls. Remittances are another avenue to fund your emergency fund.

The National Housing Trust’s refund provides an opportunity to initiate an emergency fund account or increase your emergency fund contributions. Consider your emergency fund, what I termed your “opportunity fund”. When you have a huge emergency fund it provides you with an opportunity to take advantage of deals that will add value to your life, such as a deposit on a property at a price that you may never see again. Funds can be transferred to purchase stocks in a declining market for future income and assist in creating wealth. Review and measure the progress of your emergency fund regularly. If your salary is insufficient, consider a side hustle or freelance. If you can work overtime to earn more, then do so. Just don’t give up on yourself. An emergency fund is a lifeline.

– Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at: gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com