Your emergency fund serves as your insurance for “emergencies” or unforeseeable situations where you’ll need more cash than you normally do. Emergency fund can help cover everything and anything that can happen in the future. When is it ok to use your emergency fund? The following are some of the circumstances when you can use your emergency fund. Before you spend your emergency fund consider any purchase you make carefully and determine if it is an essential need.
- Loss of Income
- Housing Repair
- Health or Dental Care
- Basic Needs
Having an emergency fund can help you feel better or at ease even if you lost your job suddenly or unable to work because of health reasons. For many, these situations are scary but those who are able to tuck some money for emergencies can worry less because they have money to spend in order to survive when an unexpected situation arises.
How to start?
- Make your emergency fund your priority by saving money. Save money deliberately and consistently so you can reach your target amount as fast as you can before trying to invest. This fund will serve as your protection from unseen situation or emergencies so you don’t have to touch investment money.
- Curb your spending – Minimize or eliminate excessive spending especially if it’s for luxury. You should also monitor your spending habits.
- Boost your savings – When you minimize your spending you can boost your savings more and save more money for your emergency fund. Look for ways on how you can cut back on your expenses to save more money.
- Income – Savings = Expenses. Apply this rule so you can allot a portion of your salary to savings. Ideally you should save around 20% of your salary but if you can cut back your expenses then you can increase the percentage you allot to improve the size of emergency fund that you save.
- Money windfalls – is large amount of money that is won or received unexpectedly. For example your salary bonus, 13th month pay or Christmas Bonus can help boost your emergency fund.
Size of emergency fund
Rule of thumb is to save around 6 to 8 months’ worth of expenses but I think another factor that you should include in deciding how much you should save for your emergency fund is how long it will take for you to find another job. The longer it takes for you to find another job the bigger your emergency fund should be to cover your family needs while you don’t have a job.
Where to keep it?
You should keep your emergency fund in a place you can easily access it but not too easily accessible that you will be tempted to use it for daily spending or other luxury spending. Do not put your money to mutual fund or bond fund because you need to easily this fund as liquid as possible instead you can keep it in money market fund or you can keep part of it in short-term time deposits so part of it can earn higher return compare to just putting it all in savings account. Remember that you should keep your emergency fund as liquid as possible so you can access it when there are emergencies. If you want to put your money to savings account you can refer to my previous post about best high interest savings account to help you decide where to place your emergency fund.
My emergency fund
After reassessing my portfolio I decided to stop my current investment and focus on building my emergency fund as fast as I can before I continue investing. I realized that saving for my emergency fund and investing in mutual fund simultaneously is wrong. Why? Because if an emergency happens anytime soon I think I am not shielded enough with how I save money for my emergency fund. I realize that I can quickly reach my target emergency fund of 6 to 8 months’ worth of salary if I focus on building my emergency fund right now. In my calculation, I can reach my target emergency fund in less than a year if I allot all my savings to my emergency fund.
I am currently allotting as much as 40% of my income for savings and now I will start saving it all to build my emergency fund quickly. I can reach my emergency fund target amount if I also save directly my salary bonus as well. Sadly I only have Php 30k in my emergency fund but once I focus on building my emergency fund I expect to reach my target emergency amount in less than a year.
After I build my emergency fund I can continue investing on my mutual fund and maybe try out other investment options that I will have in the future.