The Safety Net You’ll Wish You Built Sooner
If you lost your job today, how long could you survive before your money runs out? Seriously. Really think about it.
I want you to take a pen and paper and calculate it. List out all your monthly expenses and add up the amount. Check what you have in your savings and divide it by the amount you came up with. How many months of savings do you have right now? Let’s take it up a notch. Could you afford next year’s rent if you lost your job right now? No? How long before panic sets in and you have to start borrowing from the likes of Opay, calling up family and friends for help because rent is due soon? How long before your children are sent home from school for not paying school fees?
Oh, oh. Trouble, trouble, trouble
Taylor Swift
The Current State of Things
Based on my observations, for most working Nigerians, the answer is 2-3 months.
If your savings can not handle these major expenses, once your income pauses, then you are in danger.
And that’s not because most people are lazy or irresponsible. It’s because nobody teaches us this stuff. The minute you get a job or start earning income from a business, priority number one is to secure at least two years of living expenses in savings. By savings, I mean a stripped-down survival budget for essentials, not your current lifestyle budget.
No One Is Coming To Save You
I know it sounds extreme, but hear me out. Not “one day”, not when you start earning more, not when you finish buying all the nice things you’ve been eyeing. You do it right now. Because in Nigeria, unlike many advanced countries, we don’t have unemployment benefits, soup kitchens for the starving, government-assisted low-cost housing, homeless shelters, and coupons. We have a high rate of unemployment, an unstable currency, unpredictable cost of living, and high inflation, among others. It’s not uncommon for job hunts to last 12-18 months. We don’t have the social safety nets that you might find in other countries. If your income stops, you are on your own.
In Nigeria, most companies don’t even offer severance packages if you get laid off; heck, they might even owe you a few months of salary as a parting gift; government jobs included. Isn’t it pathetic? As a country, what we have going for us is our familial ties, where you can move in with family if you fall on hard times, but even that can come at the expense of your dignity, freedom, and respect.
One other safety net that we have going for us as a country is that if your job (IF, being the keyword here) contributed to a pension on your behalf, and you lose that job, you are entitled, once in a lifetime, to access 25% of the pension upon job loss, according to the law.
Why People Fail to Build a Buffer
It always baffled me how when people first get a new job that pays better or a pay raise from low income, the first thing they do is to start blowing their money on frivolities. Lifestyle creep comes in. They move to a bigger apartment, Ubering everywhere, constant clubbing, car upgrades, expensive wigs, and helping every Tom, Dick, and Harry with urgent 2k. They get lulled into a false sense of security, forgetting that nothing lasts forever. YOLO will not cover your rent during a crisis.
They’re not really thinking about building an emergency fund with the urgency that it requires. They’re thinking about it as, “Oh, I’m still learning to save. I will learn to do it slowly and gradually.” But I’m like, no, you need to learn to do it right the f*ck now because you could literally lose your job without warning. There are no guarantees.
This Is Urgent
You buy yourself time, options, and dignity by having that emergency fund. It’s your backup plan. It’s the plan that makes sure that you don’t have to beg people for money. It makes sure that you don’t have to be in debt. And people just treat it so cavalierly, like, “Oh, I’m still learning to save. Last month, I saved 1% of my salary. I clapped for myself. And so, you know, next month, my goal is 5%.” It’s like, no, you’re not treating this with the urgency that it deserves.
Because when you were buying those expensive bottles in the club, when you were buying Shawarma and cold stone every three days, when you were buying that wig, you did not think about how hard it was to buy them. But when it comes to building that emergency buffer, you’re talking about how you’re now improving with your savings. No, you need to improve right now. Otherwise, you’re going to suffer if you suddenly lose that source of income for whatever reason or have unexpected emergencies. And I don’t want you to suffer
I sound angry, but I’m not; I’m just hoping to jolt you awake enough to take action ASAP. I’m trying to scare you into understanding how serious this is. You aren’t a child anymore.
There’s a nuance that I have to spell out here for people with low income. Sometimes, no matter what you do, your income is just too low to save from. In that case, I always encourage people to make upskilling and getting a better-paying source of income their utmost priority.
Real-Life Consequences of Not Doing This
Life is too unpredictable to assume that income from your job or business will continue to flow indefinitely. A lot of us have heard those stories about when someone’s dad lost their job and their family is plunged into poverty. Maybe they had some savings, but not nearly enough. It might not even be that you lose your source of income, it could be a business drought where sales slow down, or you get sick or have a high-risk pregnancy and have to take an unpaid leave.
I’ve heard of parents whose child got sick and they had to take extended time off work to nurse their child back to health. It could be little emergencies that creep up unexpectedly. You have to plan for the worst. The real-life consequences of not building a shock absorber in your finances in the form of an emergency fund for when trouble hits include:
- Going into debt
- Having to beg for help from family and friends
- Panic and stress from not having money to meet up with bills
- Desperation forces you into taking bad jobs or bad deals for your business
- Not being able to quit a terrible job
- Not having the buffer to start a new business
On the other hand, if you build a buffer, you get:
- breathing room to think
- time to upskill,
- change careers
- start a new business
- gives you room to negotiate either salary or business deals because you are not desperate
- It helps you sleep soundly at night. You can’t put a price on peace of mind and freedom.
How to Make It Happen
Calculate Your Exact 2-year Survival Cost
- List out realistic monthly expenses for essentials only. (yearly rent/12, utilities, food, children’s school fees, transport costs, health/car insurance)
- Think of recurring expenses like car paper renewal, business rent/renewals, and oil changes for machines (car, generator).
- Estimate random repairs (for cars, home, plumbing, furniture, etc) and emergencies.
- Add a buffer for inflation, possible rent/school fees increase.
- Multiply by 24 months for a 2-year cushion. For instance, if you estimate your monthly stripped-down essentials to be 200,000 Naira, then your 2-year emergency fund will be 4.8 million Naira.
- monthy essentials = ₦200,000
- two-year emergency fund = (₦200,000 * 24 months) ₦4,800,000
- For advanced players, especially business owners, consider contributing to your pension monthly, so that when income stops, you can use that as an additional buffer. Also, consider paying for health insurance if you don’t have one and factor in money for yearly health insurance in your emergency fund, so that insurance can cover some or all of your health care costs if you fall sick during a job loss.
Make This Your Second Financial Goal
Paying off any debts you have should always come first. Building this emergency fund should be the next thing on your list. List of things an emergency fund should come before:
- letting your family and friends know that you have arrived
- indiscriminate black tax
- buying luxury items
- Constant eating out
- risky financial moves
- luxury vacations
- big investments
The idea of saving that much money can be intimidating, but if it helps you ease into it, consider breaking it into milestones. Aim for 3 months of emergency funds first, then 6 months, then 12, then 24 months.
Adjust Lifestyle to Accelerate the Fund
Learn to delay gratification. Try to increase your savings rate as high as you can to hit your fund number. Be ruthless about cutting out expenses for frivolities. I’m not saying you don’t deserve to enjoy your money to buy nice things and all, but pretty please try as much as you can to defer the expenses that hinder you from having a financial buffer that will protect you in hard times.
Store Funds Wisely
Emergency funds work best if you save them in places where you can withdraw them at a moment’s notice, and also preserve the value of your money over time, especially during inflation.
Places you definitely should not store your emergency fund in:
- At home in physical cash: are you trying to get it stolen or damaged? Inflation will definitely eat at it.
- Savings account: Do not keep all your funds in a regular Nigerian bank’s savings account because they almost always don’t offer interest for your money, and that can make inflation reduce the value of your money. Even when they do offer interest, it is usually quite low.
- Locked accounts: Don’t put all your money in this either. Locked accounts vary. Some don’t allow you to withdraw your money during the tenure at all. Others may incur a penalty, which may cost you some money.
- Stocks/Bonds: These securities are investments that can be volatile, especially stocks. Buying them with your emergency funds could mean that when you need to withdraw them, the stock/bond price could have crashed, forcing you to sell for less than you bought them for during emergencies.
Recommendations for Allocating Your Emergency Fund
- Start with a savings account, holding 1-2 months of expenses for instantly accessible cash. Though it is low in returns (3% and below), it is high in liquidity.
- Allocate the next 6-12 months of living expenses to one or more Money Market Funds, because of their combination of high yield (15-25%) and liquidity (within 24 hours).
- For the rest of the money, beyond 12 months, consider short-term fixed deposits as a deep reserve (7-15% yield). Fixed deposits are a form of locked accounts, and they put a psychological lock on the money, because you know there will be a penalty for breaking it.
Nobody has a looking glass into the future, so it is important to understand that you can not possibly plan for every unforeseeable event. But for a two-year survival plan, it is likely that for most emergencies you will face, it should be enough. In extreme circumstances and a big enough emergency, everything you own becomes your emergency fund.
Your job is not your safety net. Your emergency fund is. Secure it, and buy yourself peace of mind in a country where no one is coming to save you.