Emergency fund, as the name suggests, is our personal fund that we could use on emergency or in dire need. Emergency fund is not just for emergency, as it is a fund and liquid like cash that you may use when you lose a job, in hospitalization and medicines, or on something that happens accidentally to cover for expenses. In case of these incidents, and you do not have liquid funds available or you do not have cash at hand, you will be forced to take a loan, or sell illiquid investments like stocks at a loss.We are very much aware that loans must be avoided as much as possible, as emergency fund. Loans are liabilities, and you pay more in return due to interests and/or other fees. Becoming financially prepared and stable starts by building an emergency fund.
Emergency funds acts like a shield against external factors, like job loss, and other things we mentioned. We need to realise the importance of having usable funds when we really need them.
How much is an Ideal Emergency Fund?
Most consultants and financial advisers would say you need 3 to 6 months worth of your monthly salary. That means if you earn Php 20,000 a month, you need to build a Php 60,000 to Php 120,000 emergency fund.
Whoa, that’s huge. Now you start thinking about how much you need to save. It is not a strict rule to save 6 month worth of salary as emergency fund. It all depends on your lifestyle. If you have car to maintain, mortgage, or many kids studying at private schools then you might really need to allot more.
Tips to Build your Emergency Fund
- Save and maintain the fund. It is better financially to save before you spend. You might already heard this, but saving is what makes financially prepared means. You save before you spend. Spend only what is left after saving. This discipline is built not on a single day, but what is important is you know your needs and want, and your income must not be spent to zero every month. Saving money will be starting point to building an emergency fund.
- Put the Emergency Fund away from Other purposes. Emergency fund should be used for the sole purpose only of contingency. If you use it or label it as other fund and savings, then the tendency is you will be using it and forget to replenish.
- Do not pressure yourself to save more than your capacity. There is a right time and right amount to put significant percentage of your income to savings, and to an emergency fund. The important thing is you start now, and even if it is small, as long as you execute the plan on saving for the purpose of emergency fund. Gradually, it will be more ideal in amount by saving more. Just dont rush things so you feel better and not stressed.