Are you truly prepared for when life decides to deal you with a bad hand? A sudden job loss, a visit to the emergency room, your car tires are up for immediate change – all these can put a major dent to your income and budget. One which you may or may not be entirely prepared for.
But what if you’ve got everything in place before one of these major life crises happened?
You would have probably breezed through it. Why? Because you would have your safety net to fall back on: your emergency fund.
You no longer have to stress about how you’re going to pay the bills and rent for next month. Or how to survive the next few weeks following a sudden job loss.
But did you know that a whopping 60% of millennials don’t have enough money to cover a PHP 50,000 ($1000) emergency?
For those who are struggling to pay their debts, saving money for an emergency fund now might seem to be a daunting task. Aside from your debt, it can also be hard to save up for unknown future expenses if you’re suffering from impulse buying or you’re keeping up with the Joneses and have this fear of missing out (FOMO).
An emergency fund is one of the most fundamental aspects of personal finance. It’s entirely possible to start your emergency fund right at this moment.
Today, I am going to cover the following things to help you build your financial cushion to get you through a rough patch:
- What is an emergency fund?
- When to use your emergency funds?
- The advantages of having an emergency fund
- How much should an emergency fund be?
- Best place to keep an emergency fund?
- How to build an emergency fund if you have debt?
- Effective steps to starting an emergency fund today
That’s a pretty long list, so let’s get started.
What is an emergency fund?
An emergency fund is simply an amount of money you save or set aside for life’s unexpected inconveniences. It can even cover for even the worst emergencies!
I mean real emergencies, like a trip to the E.R., car wreck, a dental visit or a job loss. A sale on Amazon or Lazada doesn’t qualify as an emergency.
Emergencies do happen! It’s foolish to think that we will never undergo an emergency once or twice in our lives. And these emergencies cost a lot of money.
Most people leave things to fate and trust that things will straighten themselves out. Filipinos are mostly guilty of having this happy-go-lucky attitude. When things go for the worst, they are at the mercy of private lenders, credit card companies, or their well-to-do relatives, which will put them in a lot of debt.
Life will always have twists and turns. You don’t really know what’s going to happen, so a financial buffer is something you should be thinking of building now!
When to use your emergency funds?
As I mentioned earlier, emergency funds are strictly for emergency situations.
But what accounts as an emergency?
An emergency is something urgent & unexpected that requires money to do what needs to be done. This includes things like:
- Sudden job loss
- Medical emergencies
- Car problems
- Home repairs
What doesn’t equate to an emergency?
- Buying new things like TV, washing machine
- Buying gifts
- Vacations, Holidays
- Eating out
If your TV doesn’t function anymore, it doesn’t mean you have to replace it right there and then. Purchasing a replacement can wait and you don’t have to dip your hands into your emergency funds for that kind of expense!
You got to have a strong commitment to only use it for real emergencies.
Advantages of having an emergency fund
You can reap a lot of benefits when you’ve already set up an emergency fund for yourself or for your family. Below, I’ve listed the common advantages of having this type of backup:
1. Peace of mind – Wouldn’t it feel great to sleep soundly at night knowing that you are well prepared for whatever curveball life throws at you? Having peace of mind is priceless and will enable you to enjoy life every day to the fullest. You are free from stress or worries because your sacrifices today are contributing to your financial security in the future.
2. Saves you from acquiring costly debt –Having saved a considerable amount of money will enable you to avoid borrowing from friends or family when you need it the most. Mixing money and family can sometimes lead to hard feelings and financial trouble for the lender. Don’t complicate your most treasured relationships with money issues. You don’t have to pay interest either when you choose to shy away from credit card and lending companies. When you don’t have debt, you are in a very good position to save more and avoid dipping into your retirement fund.
3. Easy home loan approval – Forget high credit scores. You can actually get your home loan approved easily when a lender sees that your liquid assets, such as your savings are well-funded. It reassures them that you will still be able to make repayments even if you encounter a major financial setback such as a sudden job loss. It proves that you have good financial habits; thus, lowering your risk status.
4. Earn interest – When you decide to keep your money in a financial institution like the bank, it will sit there all while earning valuable interest. The more you have in your account, the more interest you will earn. Choose a type of account that has reasonably high-interest rates. Look around for savings accounts that allow you to quickly access your funds but still offer a high-interest rate. Digital banks such as ING or CIMB enable you to open a savings account through their apps that earn as much as 4% annual interest rate.
How much should an emergency fund be?
Wondering how much to save to build your first emergency fund?
The ideal emergency fund amount should be 3-6 months’ worth of your living expenses.
If you are currently in debt, you can start with Dave Ramsey’s Baby Step #1: Building a PHP 50,000 ($1000) mini emergency fund.
I know, I know! That’s a really big amount to save! But that is enough to help you cover a month or two’s worth of rent, utility bills, and groceries. Or help you admit someone to a private hospital for emergency treatment!
However, if you are #debtfree, and support others besides yourself, you may want to aim for a bigger amount. You can jump right into Dave’s Baby Step #3: A fully-funded emergency fund (saving 3-6 months living expenses).
If your household has a stable income, you won’t be likely needing much.
For example, if both husband and wife work in steady jobs for several years, then a three-month buffer should be fine. But if you’re a one-income family or don’t have a stable income, you need to be saving at least six months of living expenses in your emergency fund.
Once you have the ideal six months emergency buffer, you can start investing in better yielding instruments like an index or mutual funds, stock market or real estate.
Don’t get stressed out about saving 3-6 months of living expenses overnight. The amount you need to save will vary based on your situation. You can start small and you can start now! Just hitting an initial $500 savings goal will inspire you to build your next $1000 and so on. I will list down the steps on how you can effectively save up money (quickly) for your emergency fund below, so keep on reading.
Use the free emergency fund calculator below to help you get an idea of how much should be your ideal 3 or 6 months emergency fund and for how long you will be able to save it.
Best place to keep an emergency fund
Your emergency fund should have liquidity, meaning you need to keep it in a place where you can easily and quickly access it. It doesn’t have to be in cash because aside from it not gaining interest compared to depositing it in a bank, it will be at risk of being stolen.
I advise you to open a simple saving or checking account that is tied up to a debit card. It should be separate from the account you’re using to pay your bills with.
Avoid stashing it in a place that’s too easy to access. If you’re struggling with impulse buying, you don’t want to be tempted to dip into it. You can use a different bank account for your emergency fund and hide your ATM/ debit card somewhere you won’t usually spot on a normal day.
How to save money if you have debt?
Most people who are in debt will argue that it’s impossible for them to save because they have huge loans to repay first. Although eradicating debt should be a priority toward your financial freedom, don’t let yourself unprotected should an emergency happen.
Even as you set aside funds to pay for your debt, you should still set aside any amount that would go into your savings account.
Use Dave Ramsey’s 7 Baby Steps Plan to get your finances in order.
- Baby Step 1 – PHP 50,000 ($1,000) to start an Emergency Fund
- Baby Step 2 – Pay off all debt using the Debt Snowball
- Baby Step 3 – 3 to 6 months of expenses in savings
- Baby Step 4 – Invest 15% of household income into better yielding financial instruments or retirement plans
- Baby Step 5 – College funding for children
- Baby Step 6 – Pay off home early
- Baby Step 7 – Build wealth and give!
As I said earlier, your first main goal is to establish a mini emergency fund before smashing all of your debts. It’s better to do it this way because when things hit the fan, you will not find yourself in deeper debt than where you were before.
Effective steps to starting an emergency fund today
1. Use the B-word – Budgeting!
You will only be able to reach your goals when you create a budget. Make a budget and strictly stick to it.
You can start by listing all your expenses for the month or for two weeks if you’re paid fortnightly. You also need to list your estimated average income. Deduct all the expenses from your income and you’ll be able to see how much you can save toward your emergency fund.
When doing your budget and looking at your expenses, try to see if you can make any cuts. If you don’t often watch cable TV, then cut it. You are better off moving to a less expensive streaming service like Netflix that costs only a fraction of your cable bill. If you’re fine downgrading your pricey phone plan, then do it. You might be surprised to know that you’ve been spending money on things you don’t actually use or need.
My budgeting method includes the use of cash envelopes. The cash envelope system is a way of budgeting your income by allocating a certain amount of cash in each category/envelope. This forces you to only use a certain amount of money for a certain category until your next monthly income/salary. You do the budgeting every month or fortnightly, depending on the frequency you receive your paycheck.
You only spend what you’ve put in each envelope or category. When your money is gone, it’s gone!
2. Set your savings goals
The next thing I did was to create some savings/financial goals. I used the 7 Baby Steps for this. I then figured out the amount I need to save for each month to build my emergency fund. I initially aimed to save a smaller amount each month, but I was actually surprised at how much I could save if I cut wasteful spending like going out, shopping or eating out often. I’ve detailed how I was able to save 60% of my income in one month in another article I wrote.
Related Post: How I Saved 60% of my Monthly Income in 1 Month Using Cash Envelopes
The point is that you need to set goals to keep yourself motivated and to keep your savings growing. You can start small and focus on saving that amount in your first month. Then, you can build from there until you reach the ideal 6-month emergency fund. I tell you, it’s a very motivating feeling especially when your savings exceed your expectations. You’ll be in a saving frenzy in no time.
If you’re wondering how much it would take for you to save up your ideal 3-6 months emergency fund, just use the free emergency fund calculator above.
Before I discovered Dave Ramsey’s Baby Steps Plan, I was close to having my ideal 6-month emergency fund. I didn’t know back then what it was exactly I was saving for. I had no idea that amount was the required 6-month emergency fund to help us live a comfortable life should I be out of work for 6 months. I had no goal in mind as to where I should use my saved money.
Without a goal and having caught up by FOMO, I easily spent that money in a span of 6 months. An unexpected trip to Malaysia and Singapore with my husband, an iPhone XR, an iPhone X, computer upgrades, expensive Christmas gifts, eating out often, and a lot more had almost diminished my savings account.
I just woke up one day realizing that I don’t have enough safety net if a medical emergency arises among my family members. Although my husband is saving as much as he can, I had to be on the same boat as him when it comes to ensuring our future. I realized I had to be in control of my finances, and I started it by setting some goals.
3. Pay yourself first
Once you’ve figured out the amount to save, it’s time that you pay yourself first by automating your savings. There are apps out there that will enable you to automatically transfer a specific amount to your savings account each time you get paid. Treat your savings as a bill that you pay to yourself.
4. Ways to save PHP 50,000 ($1000) quickly
Even saving for a PHP 50,000 ($1000) can be quite hard, but know that it’s possible to save it quickly and easily. One of the ways to reach that goal is to sell some stuff you don’t need anymore. Do you have pre-loved clothes or bags that haven’t seen the light of day for years? You can post these things up for sale on Facebook. There are people out there who are looking for bargains to save just like you. Not only does this help you declutter, but it also helps you earn and quickly reach your savings goals.
You can also look for a part-time job or what the present generation now calls a “side-hustle”. A side-hustle could mean taking on a second job or starting a side business.
Now it’s Up to You!
It’s never too late to save and boost your financial health. If you’re really committed to change and form good spending habits, then there’s really no excuse for you not to act on it now.
Do not treat your credit card as your emergency fund. IT IS NOT!
You might have been given the privilege to use your credit card any way you want, but the same privilege will land you in debts with a high-interest rate.
You are not really setting yourself up for a stress-free life with that kind of mindset. You are actually contributing to its demise.
Use this ultimate guide to start your emergency fund so you will no longer have to worry about the future. Try not to think of saving as a chore. Instead, think of it as a very valuable gift you are making right now that your future self will thank you for.
Now I want to hear from you.
Have you started your emergency fund? Do you have any other reasons why you haven’t?
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