Emergency fund, we often hear this word, which probably has been reiterated to us when the pandemic hit and now that there’s talk about recession.
We may have heard about this, but do we already have an emergency fund?
It’s best to understand more about this, so we will discuss how much you really need to save for this and how you can start saving for an emergency fund. If you’re having a hard time saving, then you can read more about saving money and some strategies you can do to be able to save more.
Have you ever heard someone say, “Don’t save for an emergency because the emergency will come”?
If this is one of the reasons why you’re not saving for your emergency fund. Then it’s important to understand what is really an emergency fund first.
What is an Emergency Fund?
An emergency fund is a budget set aside for unexpected expenses or financial emergencies, such as job loss, medical bills, natural disasters or pandemics like the one we recently experienced.
The purpose of an emergency fund is to provide a financial safety net so that you do not have to rely on credit cards or loans to cover unexpected expenses. Generally, experts recommend that our emergency funds equal at least three to six months of our living expenses.
Living expenses are the amount you normally spend for your needs like food, rent, clothing, transportation or any other expenses you can’t really live without.
How much should you save for an Emergency Fund?
Generally, experts recommend that our emergency fund is equal to at least three to six months of our living expenses.
Living expenses are the amount you normally spend for your needs like food, rent, clothing, transportation or any other expenses you can’t really live without.
So, if your living expense monthly is Php. 30, 000.00 then you have to save Php. 90, 000.00 to Php. 180, 000.00 for your emergency fund.
Advantages of Having an EF
Now that you have a better understanding of what is an emergency fund, here are several reasons why you should start saving for your emergency fund:
- Unexpected expenses
Emergencies happen, and they can be costly. An emergency fund can help cover unexpected expenses, such as medical bills, car repairs, or home repairs.
So try to remember when was the last time you had these types of challenges when suddenly you really need to have money but can’t do anything because you don’t have any savings.
As for us, there are really moments we are put into this kind of situation, and probably one of the worst is when my little one got sick during the pandemic. We had to bring him to the hospital because he had a seizure, and when we got to the hospital, they had to do a swab test, which was costly back then. So I was worrying and trying to figure out where to get the money to pay for it.
That’s when I decided to set aside our emergency fund because unexpected situations happen.
- Job loss
Losing your job can be a financial disaster, especially when you don’t have any savings or that is your only source of income.
Sometimes we may think this will not happen to us, especially if we are in the company for a long time, but the pandemic taught us many things. That even big companies can let us down, or even recessions can change the course of our employment.
That is why it is very important to have something for unexpected things such as losing our jobs. If you have an emergency fund, this can help cover your living expenses until you find a new job.
- Financial stability
Having savings for your emergency fund can help provide financial stability and peace of mind. You can be at ease knowing you have a cushion to fall back on in case of financial hardship.
- Avoiding debt
Without an emergency fund, you may have to rely on credit cards or loans to cover your unexpected expenses. This can lead to a cycle of debt, which can be difficult to break out of.
So having something set aside will help you get through any unexpected expenses without getting into a lot of debt.
- Improving credit
Having a credit score is not common here in the Philippines, but a credit score is important in other countries.
I think for us we can think of this more about our reputation.
If you have an emergency fund, you are less likely to rely on credit cards or loans, which can help your credit reputation.
- Reduce stress and anxiety
One of the most important things we need to consider nowadays is our stress and anxiety levels.
Knowing that you have money saved for unexpected events can reduce stress and anxiety because you will not have to worry about how to pay for unexpected bills or expenses.
This, in turn, gives you a happier and longer life.
How to Build your Emergency Fund in the Philippines
Building an emergency fund takes time and discipline, but it is possible with the right approach. Here are some steps to help you build an emergency fund.
1. Set a savings goal
Determine how much money you need to save for your emergency fund. A good rule of thumb is to save enough to cover three to six months of living expenses.
Compute how much is your monthly living expenses and then multiply it by 3 months or 6 months. You can probably start with 3 months first. Knowing the goal can help you achieve it.
2. Create a budget
To save money for your emergency fund, you need to know where your money is going. Create a budget to track your expenses and identify areas where you can cut back.
Creating a budget is not that complicated, you can read more about how to create a budget in our budgeting article.
3. Make saving a priority
When it comes to saving money we always think this is hard because we only have enough money for our daily needs but sometimes we can actually find ways to pay for a cellphone in instalments.
So try to treat saving for your emergency fund as a bill that you have to pay each month like a cellphone or any gadget you may want to buy. You can also automate your savings by setting up a direct deposit from your paycheck into a savings account.
Set aside a fixed amount every month until you reach your emergency fund amount.
4. Look for ways to increase your income
If you really don’t think your income is enough to cover your living expenses plus some savings, consider taking on a part-time job, selling items you no longer need, or finding ways to earn extra money.
We have to go through this as well when we were just starting. We had to find ways to really increase our income to be able to save for our emergency fund.
5. Be patient
Building an emergency fund takes time, depending on your salary and saving habits, but since you’re able to understand the importance of this, then you have to be patient and stay committed to your savings goal.
Sticking to saving the amount you set aside to save monthly is a great help so have the discipline to really save the amount monthly.
It may sound so impossible but any small amount you decide to save will go a long way. Just be patient. You’ll be surprised by what you can achieve a year from now.
6. Be flexible
Be open to adjusting your savings goal and budget as needed. If unexpected expenses arise, don’t give up on saving altogether, try to adjust the savings plan instead.
This is important to note especially if you’re the type of person who gets discouraged easily. Remember to get back on track the next month if something affected your saving goal this month.
7. Avoid unnecessary expenses
Knowing what are your unnecessary expenses is very important for this step So we’ll go back to your budgeting and really review where your money is going. What are the expenses that you can live without and do your best to eliminate those items.
Cut back on unnecessary expenses and avoid impulse buying, it can help you save a lot. Impulse buying is another thing we have to deal with most of the time.
Try to challenge yourself if you really want to buy something that is costly. Encourage yourself to buy it only if you complete your emergency fund savings.
8. Keep the fund liquid
Keeping the fund liquid means you should not invest your emergency fund in things that are hard to sell. Like buying gold or real estate. These types of investments may give you good returns but consider how much time it will take for you to sell them this will defy the purpose of your fund.
Keep your emergency fund in a savings account or a money market fund, so you can easily access it when needed.
Where to put your Emergency Fund?
After saving for your emergency fund, it’s best to put it in the bank so that it’s liquid and you can easily access it if needed for emergency purposes of course.
One of the arguments though is that earnings in banks is less than 1 percent per annum. So if you think about it your money will not really earn and will just be stuck in the bank.
Technically this should be okay since the purpose is really for you to have a fund you can easily access when needed.
Now if you want it to still earn while waiting. One of the options is to put it in online banks. Some online banks offer a higher interest rate compared to regular banks.
Some also suggest putting it in cooperatives that have a good track record for dividends. Your money can still be easily accessed but will earn a higher dividend compared to regular banks.
You can read more about saving account here.
Conclusion
Saving money for an emergency fund is a crucial step in building a solid financial plan.
The emergency fund should be our first goal when we start saving. Having an amount set aside can give us peace of mind.
Remember, building an emergency fund is a process, and it requires discipline, patience, and a long-term mindset. Make saving a priority, and you will be able to build a solid emergency fund in no time.