‘Spending Shocks’ is subject area that is very important and also very relevant in the current season of rising prices. Spending shocks encompass a wide range of unexpected expenses that you do not see coming: anything from a broken boiler to a last-minute flight to attend a family funeral. They are often large, irregular expenses that put household budgets under strain and their effect could be very devastating if one is not prepared.
So how do we prepare for spending shocks? Over the years, I have learnt that building my own “insurance policy” in the form of rainy-day savings, AKA an emergency fund, is the all-important shock absorber that I need when stormy life occurrences affect my finances. The idea behind this saving is that you already know these spending shocks will happen, so you have an “emergency reserve” stash of cash that you can add to your budget if needed.
People who have had large and unforeseen expenses arise can probably tell you one of two things: how happy they were that they had an emergency fund or how difficult it was to find the money they suddenly needed. As with most finance-related issues, pre-planning is a key factor in successfully weathering the spending shocks we are all sure to face in life.
So how much cash, exactly, should an emergency fund contain? Most financial experts suggest you should save at least three to six months’ worth of living expenses in your emergency fund. This money should be in a separate savings account and must not be used as part of your normal day-to-day cash. I encourage people to open an account that can’t be accessed with their debit card, such as an online-only eSavings account. I also encourage automatic transfers to this designated account from your primary bank account to match up with your paydays.
I want to stress the goal of a rainy day fund. And I am stressing this because some people think emergency savings is a dumb idea because it yields no interest while sitting in a savings account. Let me remind you again, emergency savings is not supposed to be an investment. It is an insurance with one purpose: to protect you and your family during a personal financial crisis. I encourage you to start small. Save as often as you can. Start with an amount you can commit to monthly, then gradually add more as you get comfortable. Save a little until you can save a lot!
About Nike
Oyenike Adetoye (aka Nike) is an impactful speaker, author, and personal finance expert. A Chartered Management Accountant by profession. Nike is the founder and CEO of LifTED Finance, a private financial firm that educates, coaches and supports people on their journey through financial fitness and wealth management.