How To Build An Emergency Fund And Why It Is Important
This article is posted under Personal Finance.Having an emergency fund is a necessity for everyone. It’s quite common sense to always have readily available cash for unforeseen expenses.
However, despite this fact, many do not have an emergency fund. And even if they do, it’s usually not enough.
I asked some friends if they have an emergency fund and fortunately, 6 out of 10 of them have one. Nevertheless, only 2 of them have more than one month’s worth of expenses saved. Which brings us to a common question about emergency funds:
How much money should you save and keep as your emergency fund?
There is no precise answer to this question. But it’s best practice to have at least 3 month’s worth of your usual monthly expenses saved. The optimal amount actually depends on the stability of your income sources. Single regular employees are usually good at 3 months but married professionals should consider having at least 6 to 12 months worth of expenses as their emergency fund.
I guess the most practical way to know how big your emergency fund should be is to answer the question: If you lost your job now or if your business closes down, how many months will it take you to find new work or start a new business?
An emergency fund is something we never really think about until the time comes when you need it. So spare yourself of the stress and avoid the unnecessary worries by building one as soon as possible.
One more thing, never think of your credit card as your emergency fund.
A few weeks ago, my car had some problems and I had to spend quite a sum for the repairs. My regular mechanic doesn’t accept credit cards. If I’d taken the car somewhere else that does, I believe I would have spent more for the same quality of work. This is just one example that proves that there’s really no substitute to having cold cash when you really need it.
So how do you build an emergency fund? There are five basic steps.
Step 1: You have to track your expenses. You need a comprehensive look at your monthly spending to determine your personal costs of living.
Step 2: Assess your needs. Evaluate your financial status and decide how many months should your emergency fund be.
Step 3: Decide where you’ll keep it. It usually best to open a separate personal savings account with ATM access for your emergency fund.
Step 4: Start saving. You can initially pay yourself first, then move on towards doing other money saving activities.
Step 5: When you reach your goal, continue saving and build it more.
I believe that the last step is very important. When you reach your goal, don’t stop and continue to build your emergency fund. There are a couple of good reasons why you should do this.
First, as time goes by, your cost of living increases – you get married, you have kids, inflation happens, etc. When these occur, your emergency fund should adjust accordingly. By continually adding more cash to your emergency fund, you can then confidently “upgrade your lifestyle”.
Second, your emergency fund can alternatively act as your investment fund. When very good opportunities come your way, you’ll have extra money that you can comfortably risk on an investment.
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Photo courtesy of Ed Yourdon
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Hi, my name is Fitz and this is my blog on personal finance.
I am just starting to build my emergency fund.
si angel cuala ng fatherblogger.com ay nahingi ng konting tulong financial sa inyo sa kadahilanan na ang butihing asawa niya e nadiagnose ng dengue. nakaconfine po ang asawa niya at nangangailangan ng 10k para sa blood transfusion. kung gusto niyo pong tumulong e iemail niyo ako sa itot54joni@yahoo.com. ako na po ang tatanggap ng mga tulong financial niyo dahil unverified po ang paypal account ni angel. maraming salamat po.
Emergency Fund should really be the first to establish before any major expenses.
How about using a cash card which you can use to get a cash advance while your emergency fund is actually in a bond fund, which you can then unload if really necessary? Another alternative could be opening a BPI Express Direct Savings account that gives annual rates of 1.875% if your savings reaches 100K and 2% if beyond 500K, their interest rates beats any other bank I know. I believe this would suffice if you just want to have an emergency fund you can withdraw anytime. Just my 2 cents. =)
For tracking expenses, a spreadsheet is most useful. You may use other applications such as Quicken, YNAB, MS Money, Mint, or the free Buxfer. But personally a spreadsheet is what worked best for me.
If only starting to build your eFund, it’s best to join your company’s ‘paluwagan’ if there is one. Ask your HR about it. Our company have a program and last year, the participants earned a whopping 7% for their deposits.
BDO offers 1.875% for about 10K deposit locked for 30-90 days; 2.75% for 180 days up. I know this ’cause I just inquired yesterday and I’m gonna open 2 time deposits tomorrow. Also, before opening a bunch of time deposits, a little analysis of the would-be income is in order to optimize the benefits of time.
You’ll be pleasantly surprised
@Yvon
Good for you. Having an emergency fund is an empowering experience.
@itots
Timing naman ang comment mo. Off-topic na medyo on-topic. Hehe. Usap na lang tayo sa chat bro.
@Tyrone
That correct. Most people are easily tempted to buy something expensive when they see a lot of money in their savings account. By always keeping in mind that it is your emergency fund, I hope that they’ll now think twice before touching it.
@Jay and twc
I agree, there are ways to leverage your emergency fund to earn a little bit of money on the side while keeping it liquid and accessible. Thanks guys for the information. I will look more into those and probably write an article about it.
Ah yes, I am not good in computing my previous expenses. But I think I used to have this emergency funds somehow before my family suffered from Dengue, and it was a nightmare in the mind, in my heart, and in the pocket.
I am glad it’s almost over.
Thanks!
buti nlng nbasa q to, mg-uumpisa n aq ng emergency fund
Worth mentioning is that there is a Maxi-Savers product of BPI now where you have an ATM if you do need it right away, higher than regular savings (starting at 1.375% pa) plus 1% bonus p.a. for that month if you don’t withdraw from it).
The minimum is 50k (though 25k for BPI Family). Nevertheless looks like a good balance between easily accessible money but not too tempting to spend because of the 1% bonus.
I think the first step is really knowing your monthly expense, come up with emergency fund based on that. Then invest the rest.
Thanks for all the info shares Fitz, keep them coming