We always hear about Emergency Fund (EF) when we start to manage our finances. Financial advisers advises it, family & friends with good finance practices encourages – but what is an emergency fund? This will serve a financial safety net for those unexpected expenses. It is money stash aside to cover the family’s monthly living expenses and basic needs when you are unable to work or earn.
Why the need for emergency fund?
There are a lot of reasons why you need to set aside money: job loss, calamities, medical emergencies, etc. The Emergency Fund is essentially the saved up money you use when you do not have the capability to work. It will cover your living expenses when you’re unable to work.
For example: unexpected work retrenchment happens or you’re on a medical leave without pay
With Emergency Fund, you do not have to worry about where to get the money for your basic needs & living expenses for the months it covers it.
Why should it be the first savings to put up
Ideally, your Emergency Fund should be the first savings you need to set aside. This will help you establish a healthy financial discipline of putting money aside and not looking at is as a financial source should your budgeting fails. It also gives you a better perception of preparing for the unforeseen and the future. Finally, it also covers your financial finances during a loss if job or an unforeseen circumstance.
How much should I set aside?
Your EF should typically cover 3 to 6 months worth of living expenses. It will cover your family’s basic needs like your monthly rent or mortgage, utility bills (electricity, water, etc.), financial obligations and food budget. It does not include dining out, entertainment, college fund, new home, or other financial goals. This basic is the monthly amount you need to keep your home financially afloat.
Where to put or place your emergency fund?
Emergency fund should be the most liquid and accessible funds you should have around. It should be placed where you can easily access it when you need it but not too accessible that it will be easy grabbed for daily spending. To put it lightly, this is a “sleeping” fund that will be used solely for “emergency” purposes only.
We deposit our EF in high-interest savings account in a bank that can earn up to 1% interest if no withdrawals are made in a certain period. It is like a mixed of regular savings account and a time deposit. It can easily be withdrawn when needed BUT not too accessible for unnecessary spending. And since we will not be withdrawing from it unless needed, this allows the funds to grow more than just placing it in a regular savings account.
How to start an emergency fund
The first thing you need to do is to have a monthly budget for your living expenses. This monthly budget should cover monthly rent/mortgage, utility bills, financial obligations & food. It will be the basis for your EF.
So if your monthly budget is 30,000PHP, you need:
90,000PHP to cover 3 months
180,000PHP to cover 6 months
However, you need to reassess you if your family’s monthly living expense has increased (e.g. new family member). Your Emergency Fund should grow directly proportional of your living expenses growth. So if you started this fund that covered the living expenses of a family of three, you need to increase it alongside the growth of you family’s finance needs.
In some books and financial advise, they do not include financial obligation (monthly insurance premiums, etc) in the Emergency Fund. But I suggest you include this, that way your monthly premiums are still covered and paid for.
What if you do not have enough money to set aside for you financial goals let along your EF?
Do not get easily discourage.
You can start by targeting a goal, setting aside extra money and save one month at a time until you reach 3-6months worth of living expense.
When we started, we gave this a high priority and placed all extra funds that we had into it. It was not easy ofcourse because we did this right after getting married between finding a rental apartment, buying furnitures and appliances and settling down. We battled with our worries on how to raise the amount. At that time, our income and expenses was nearly break even. But we were blessed with opportunities through side projects and hustles that allowed us to earn more. This in turn gave us extra money to set aside for our Emergency Fund until we finally reached our EF goal.
When you reach a healthy and reasonable threshold, it is encouraged that you start working on your other savings and funds to help you set up for financial freedom.
Everyone needs to save for the unexpected and the best time to do it is before you actually need it. Having money set aside can mean going through a short financial challenge or into deep unexpected debt.