Emergency Fund
How to Build an Emergency Fund
Do you want to learn how to build an emergency fund? I am guessing yes that’s why you landed on this page.
Well then, you came to the right place! Let me teach you how to build an emergency fund.
You might have been hearing this term “emergency fund” often, especially during this Covid 19 pandemic that we are experiencing right now. Financial advisors have been posting daily on social media platforms about this “emergency fund” and how imperative it is to create one.
But first, do you have any idea what Emergency Fund is?
Emergency Fund is the amount saved by a person for himself or for the whole family, which is intended to support their way of living and cater unexpected circumstances like loss of income, illness, calamities, accidents, or unlikely expenses. The amount could vary depending on their standard of living which includes all the expenses they spend every month. Married people are most likely to build a larger emergency fund than single people.
There are five ways to help you build an emergency fund.
1. Determine Your Monthly Expenses
You must identify your expenses for one whole month. List down all your bills like electricity, water, internet connection, Netflix, mobile line, rent or mortgages, expenses for food, groceries, tuition fees, and others. All of these must be paid continually even if you lose your job, or if you had an accident, or if you become ill. That’s why all of these must be included on your emergency fund.
2. Compute for the Minimum Emergency Fund
Suppose you computed P20,000 monthly expenses. For how many months should your Emergency Fund be? The answer is a minimum of six months. So that means you have to build an emergency fund amounting to P120,000.
Now the question is, “How do I build the P120,000 emergency fund?”
What most financial gurus will advise us: ‘You must live within your means.’
But Robert Kiyosaki said ‘you must increase your earnings to increase your means too.’ (Robert Kiyosaki is an American businessman and author who wrote the best-selling personal finance book entitled “Rich Dad Poor Dad.” He offers personal finance education to help you learn about cash flow, real estate investing, and how to start a business).
It is important that you are financially responsible to spend less than what you are earning. (Expenses < Income). A good household budget is the key to achieving this. I’ll discuss it on my next blog so you could have a clear picture of budgeting your earnings.
3. Determine How Much You Can Set Aside Every Month to build an Emergency Fund
If you have a P20,000 monthly expenses, then I assume your monthly income must be P30,000 and above.
In budgeting, when you receive your paycheck every month, a minimum of 20% goes to savings. Some goes up to 30%, 50% or even higher.
From your income of P30,000 monthly, let’s take 30% as Savings (P9,000). Remember to take your Savings first before you spend the rest of the money.
Income – Savings = Expenses
P30,000 – P9,000 = P21,000
From your P9,000 Savings, you can segregate it to your Emergency Fund, Investments, and other plans you are saving for. For example, you would like to take P5,000 for your Emergency Fund and the rest for investments. I would also talk about investing habits in the coming blogs so keep following.
4. Compute How Many Months You Have to Save to Complete the Emergency Fund
Now clearly, you have set P5,000 monthly to save for your Emergency Fund. How many months would it take to complete the P120,000 emergency fund?
Divide P120,000 to P5,000. 24 months. It would take 2 years to build your Emergency Fund. You may achieve this in a shorter time if you can find another source of income so it really pays to have another one.
Note that this computation is solely based on realistic monthly income and expenses. It could be a fixed income of a regular employee or a combined income of husband and wife. The process remains the same for lower income earners. The key is to stay living within your means. You can also add another sources of income to ensure you can build the necessary funds at a faster pace. I will discuss this too on another blog on How to Find Another Source of Income at Home.
5. Know Where to Put Your Emergency Fund
I have completed the P120,000 Emergency Fund. What should I do with it?
This becomes the mistake of other people when they invest their emergency funds to other businesses. Investments tend to keep your money for longer time to appreciate. Once you withdraw your investments due to emergency situations, chances are you have lost a huge amount of money by selling your investments at a much lower price than you invested.
Emergency funds are not the same as your usual savings fund because the former must be accessible anytime you need it.
So you might be asking where to put that big amount of money?
Remember, it must be accessible and in cash. You can keep the P20,000 (good for one month) cash in your house. Store it in a dry and clean plastic and put away anywhere you won’t forget.
The remaining P100,000 can be deposited in the bank separate from your regular savings account. Now we all know that money in the bank don’t really grow with interest. The 0.25% interest in the bank is obviously very small as compared to the 5% inflation rate that we have. But that doesn’t matter at all because our purpose is to keep the money accessible and liquid. Some applied for time deposit maturing every month to beat the inflation but if your only purpose is to keep the money without thinking about uncertainties at all, then you’re good with the savings account. I’d suggest you open a separate savings account for this.
I’m still working to complete my Emergency Fund
While you are still saving for that P120,000 emergency fund, you can also open a separate bank account with passbook and ATM card. Write on your passbook “Emergency Fund” to remind yourself what it is intended for and to motivate yourself to push harder for your goal. ATM card is necessary during the emergency when the banks are closed and you can’t withdraw over-the-counter. Just keep it away your regular debit card to avoid buying the non-emergency items you saw on the ads.
Bottomline:
Setting up an Emergency Fund is not just a necessity but also a responsibility. During this pandemic due to Covid 19, we have realized the main purpose of this fund. Two months of no work, no pay. Two months of uncertainties. Who knows how long we need to flatten the curve?
We wouldn’t want our government to be responsible for our everyday food.
We wouldn’t want to be anyone’s responsibility.
We are responsible of our own life, of our own family.
It is definitely not easy to build an emergency fund, but it is all worth it. There is no amount of money that could pay for your peace of mind when you know you are financially secured.