The ABC of Building an Emergency Fund

If you read my post about budgeting you’ll see that one of our financial goals for now as a newly wed is building an emergency fund. On our budget plan, under savings category, we created a sub-category called Emergency Fund.

Sponsor

Every month we make sure that we allot a specific budget on it. Our goal is to save at least 6-12 months of our monthly expenses. We’re on progress.

We know it could take sometime but we are confident that sooner than later we can build a solid rock emergency fund for our family.

Update: We’ve already completed our emergency fund, read it here! 🙂

This is one of the most important steps in taking charge of our personal finance. We need to have an emergency fund. Sad to say, most of the Filipinos do not have an emergency fund.

If fact marami sa atin ang hindi nakaka-alam ng tunay na ibig sabihin ng emergency fund. Since the main goal of this blog is to share personal finance literacy to all of us, we will share some basic information about building an emergency fund. I’m not an expert.

As you read on my about page I’m telling everyone that I’m also a newbie in personal finance. Every article I write on this blog are mostly based on my personal point of views and experiences. Please do not take it as a professional advise but rather a point of reference when you make personal finance decision in your life.

Everyone of us should do our due diligence and seek advise from professional if we need to.

Alright, back to the topic. 😀 Before we build our emergency fund, we need to make sure that we have a budget and we are following that proper budget plan.

We need to know the ‘in and out’ of our money so that we can easily allocate a proper amount for every category in our budget including our emergency fund.

As I mentioned, it is advisable to have at least 6-12 months amount of monthly expenses (this is for a married guy like me) or at least 3 months for a single person.

So how we start building an emergency fund?

Again the first thing we need to do is to budget. Create a budget plan. Read my article about budgeting 101 here. Even before we invest, we need to have an emergency fund. We will talk about investing in other articles.

But for now, you can read my article about the best investment that gives more than 1000% return here.

Once we have a budget plan, we can identify how much we will allocate to our emergency fund. Let say your monthly expenses is Php 25,000 that means you need to save atleast Php 75, 000 as your emergency fund. Just multiply the total amount of your expenses in a month to 3-6 if your single or 6-12 if you’re married and has a family.

Example:

Juan is a single guy who works in a corporate office. He’s monthly expenses is amounting to Php 25,000. He realized that he need to take charge of his financial situation.

He learned that the first step is achieving his financial freedom is building his emergency fund.

As an example, the ideal minimum emergency fund target should be like this:
25,000 x 3 = Php 75,000 (ideal minimum emergency fund for Juan)

On the other hand, Jose is a family guy. He is also a newbie in personal finance. Since he’ll become a father in the near future, he realized that he need to do something on their financial situation.

He was invited on a seminar to start to invest to grow their money. But as advised on the seminar, before start investing he needs to build an emergency fund for his family. There are also other things he need to do first before investing.

He was so eager to start. So he is very serious in taking the first step, which is to build an emergency fund. As advised, he need to save at least 6 months of his family expenses before taking the next step.

Based from Jose’s family budget, their monthly expenses is Php 45,000. He’s ideal minimum target of emergency fund is: 45,000 x 6 = Php 270,000 (ideal minimum emergency fund for Juan).

Now since both of Juan and Jose know their emergency fund target, they can now allocate whatever amount they are comfortable every month to start building their emergency fund.

It doesn’t matter how small we save, for as long as we do it consistently soon enough we’ll reach our goal.

The figures above is just an example. Please do not take it as a professional advise. Honestly, there is really no exact amount of emergency fund that is right for everyone. It vary from every individual or family and their lifestyle.

The main concept is to have something in case of uncertainties or ‘real emergency’ and/or support your lifestyle even if you lose your job or source of income. That is the ABC of building an emergency fund.

Ask yourself, how long can you sustain or live your lifestyle if you lost your job right now or your business? Your answer will be the basis of setting your emergency fund.

Where to use your emergency fund?

As the name implies, this should only be use in case of EMERGENCY. Unplanned dine out with office mates is not consider an emergency. A 50% sale in the mall is not also an emergency.

We’re talking about life uncertainties or an accident or a natural calamity here. Or any other uncontrollable situation that can affect our life. It is also not advisable to use your emergency fund in an investment. As the main purpose of this fund is for real life emergency and not for investing.

Before you invest, make sure that you’re working on your budget and you already build an emergency fund. Budgeting and building an emergency fund is the basic steps in personal finance before investing. Just take one step at a time.

Here’s some list of actual emergency where you can use your emergency fund.

1. Losing your job

Losing a job can really be a disaster if we’re not prepared. In an economy like we have right now, everything is unstable.

You can still lose your job due to uncontrollable situations like recession, cost cutting of the company, shutdown of the company and many other reasons.

This is one of the main purpose of building an emergency fund. To continue to live and sustain your lifestyle in a situation like this. Make sure that you have an emergency fund that can support you and your needs until you find a new source of income again.

2. Sickness, Accident or Hospitalization

Another reason why we need to build an emergency fund is for our health. We are all humans and along the way we will encounter some situation where we get sick, got accident or being hospitalized.

In a situation like this, emergency fund comes in. This can really help us financially since we do not need to take money from other category in our budget.

Although we also need to have insurance to support a case like this, having an emergency fund is a big help.

3. Natural calamity like flood, earthquake etc.

Since we are living in the Philippines kung saan taon taon ay dinadaanan ng malalakas na bagyo at iba pang kalamidad mainam na meron tayong nakatago in emergency case like this.

It is advisable to keep some cash as emergency fund as we cannot widthraw to an atm or bank in situation like this. Ika nga natin sa lumang kasabihan, pag may isinuksok may madudukot.

4. Death

Death is also one of the things we need to prepare. We all know that we’re all going to die. Preparing for a circumstances like this should be one of our goal in life while we are strong and active.

Although it is a must that we get a life insurance, having an emergency fund can be a big help too.

Additionally, life insurance can also be a form of emergency fund (sort of)  in case something bad happen to any member of the family. We will share information about insurance in future articles.

Those situations and example above are one of the main reasons why we need to build an emergency fund. But that’s not all.

As mentioned above, this really depends in each one of us and our family situation. A car broke down can also be treated as an emergency. A faucet need to be repair. And many other else. There’s no exact list. What important is we have something in case we need it.

Where to put your emergency fund?

So we are good. We have the budget plan, we created the budget and we’re ready to set our financial goals. We know that our first target is to build an emergency fund.

Next question is how do we keep it? Where are we going to save it? Are we going to keep the cash in our home? Or do we need to put it in the bank?

The answer is, it depends. It depends on YOU. You can keep it in your home or you can save it in the bank. As long as it serves its purpose, be it.

But you have to remember the consequences where are you going to put it and the time you’re needing it. Let’s say for example, you save all of your emergency fund in the bank and an emergency situation came where it is holiday or weekend. What are you going to do?

Say you have it on ATM but there’s a super typhoon and you cannot go outside. Or say you keep it in your home but accidentally your home burned by a fire. Or pwede din pasukin ng mga masasasamang loob.

There are so many circumstances. As the expert advise, it is better to have it on the bank where you can have an easy access. Say open a savings account with ATM so that you can immediately withdraw in case emergency situation arises.

BUT it is also advise to keep some cold cash in hand or at home. For those type of emergencies where we really need it and going to the bank or ATM machine could take some time, having cash in hand and at home is a great help. So to answer the question right, where do we need to put our emergency fund? It should be at both in the bank and at home.

What to do next when you built your emergency fund?

If you follow your budget plan and do it consistently, sooner than later you will be able to achieve your financial goals. And one of them is your emergency fund. Say you’ve built your emergency fund and are ready for the next step.

What to do next? This will depend again from every person. The next best thing to do is to continue working on your other financial goals. Say your short term and long term financial goals. Whatever it is, do as what you prefer. Take the next step in achieving financial freedom.

It is also advise to continue putting some ‘extra’ budget on your emergency fund along the way even if you hit your target. This is because your needs and expenses may change along the way.

Say you when you got married if you’re single or you got a new baby if you’re married. Your monthly expenses may change and you may need to adjust. Make sure you asses your finances including your emergency fund while continuing your journey to financial independence.

There you go. If you read this far, I hope you now got the idea about the ABC of building an emergency fund. This is just the basic. While there are so many other articles online, I hope you found this article useful too.

Please share it to others to spread basic personal finance literacy, one blog at a time.