To Invest or Not To Invest Your Emergency Fund
An emergency fund or a contingency fund is a safety net. It is that account that you only remember when something bad happens or something when the purpose for which it was created is required.
An emergency fund or a contingency fund is a safety net. It is that account that you only remember when something bad happens or something when the purpose for which it was created is required.
It could be towards the settlement of possible medical bills, to take on opportunities that might arise, or to wake up one day and decide to relocate to another country. You can think of this fund as a piggy bank you break only when you are desperate enough to do so – when you have no other choice.
This fund can be anywhere from under your bed, to a savings account, and of course, an investment of your choice. There are a number of things to look out for when considering whether to invest the funds (and what type of investment) you have set out for emergencies or not.
How the money is being kept
The first thing to consider is how the money is being stored in the first place. If you are storing the money under your bed literally, in a safe in your house, or in some other unsecure platform, you have more things to worry about.
Beyond the actual security of your funds from fire or theft, you need to worry about the reduction in value of your funds. If you are young, you would have heard your parents talk about how N2,000 could buy a car back then.
No thanks to the ever rising rate of inflation amongst other things, the value of your Naira today is less than its value tomorrow or in 5 years. As such, your money would be able to do less as time passes.
While we can admit that very few people would actually store funds in their homes, the commonest way people save their funds is to keep it in a savings account. This too has its risks. Most saving accounts do not pay enough interest to cover the rising rate of inflation.
For example, a savings account could yield an interest rate of 8% annually, while inflation is at 17%. While it would can provide a better buffer, its value in terms of its monetary worth might still be lower than what it used to be.
The level of importance attached to the funds
Of course, it is a contingency fund so it has to be important. However, it is important to have a clear understanding of this. Is your contingency fund a stash of all the funds you don’t need now or is it one that could ultimately impact the lives of your children and their education amongst other things.
If there are provisions for retirement, college fund, with hospital bills being taken care of by a trusted health insurance scheme, then maybe the contingency fund can be invested in stocks and left to grow for the long term.
Otherwise, if it does need to be invested, it can be invested in a riskless security whose interest rates are much higher than a savings account like treasury bills.
How much of it can be recovered speedily
Hypothetically, if you need to pick up a bag and run out of the country, would you be on your way immediately or would you have to try to sell a property first? Contingency funds are expected to serve as an immediate source of financial aid.
As such, investing in assets that cannot be easily converted to cash might be counterproductive. Based on your objectives for the fund, however, you can set aside a portion of it to be invested in assets that can easily be converted to cash, another to be invested in medium risk/ return (and medium delay) securities, and the last percentage to be invested in higher yielding securities that could take a bit longer to be used.
The decision is a largely personal one. Every decision has its own negatives and positives and only needs to be taken for the right reason.
Written by Lawretta Egba.