Every time I conduct Financial Planning Seminars, I always stress out on the importance of Emergency Fund. It is a fund that we can instantly get hold on, in case of emergencies.
Why is that? Coz if we don’t have any and emergency strikes, where do we see ourselves? We’ll always end up borrowing money or DEBT – which is something that we definitely hate the more.
What are these emergencies? Medical emergencies like sickness, hospitalization, accidents, property loss, house repair. Even loss of job is considered as an emergency nowadays due to downsizing and retrenchment.
I can still vividly remember my experience in my 2nd job. After like 6 years in the company, all of a sudden, the management was shutting down the company due to bankruptcy (funny that the company was established without the purpose of generating income). For someone who has no plans of job hunting again, it was a tragic situation to get into. Good thing I had some savings that time that gave me ample time getting back on my feet again. That was my first encounter on emergency fund.
Let’s have a look on this episode of ANC On The Money about Emergency Fund. Be sure to watch the whole video below.
Expect the Unexpected.
This is an axiom we often hear but seldom hold dearly. But for those who are building up their wealth or those who are on the road to financial freedom, this can only be true when you something to “tap” into when an emergency happens.
Kendrick Chua, a registered financial planner, enumerates and gives examples what are those that are considered as emergencies. He iterates that “a sale” is not an emergency. Furthermore, he exclaims that the last thing you want to happen is “you getting into debt because of emergencies.”
The important point to remember in setting up an emergency fund is that it should have higher yield, and higher liquidity.
Size: A good basis for the size of an emergency fund is about 3-6 months of the total living household expenses.
Liquidity: You should be able to get or withdraw your emergency funds within 2-3 days. Examples for this are Savings Accounts, Money Market Funds, Fixed Income Funds, or even Time Deposits. It is important too that you get as much return from these funds while it is tucked away.
How to Build an Emergency Fund
- Attitude/ Discipline. Realize the importance of your emergency fund. You need to start somewhere, whether you start saving 10% of your income or as low as 5%. Stick to your decision and map your mind towards your goal.
- Automate Things. When the monthly income comes in, certain banks can get a certain amount (which you dictate them to) and deposit it into another account for you. This way, you will be able to spend only after you have tucked away a nifty sum for your emergency fund.
- Peer Pressure. Surround yourself with people who will motivate you with your goals.
Salve Says
How to save for your Emergency Fund:
- Sell your Trash – you may not know that some of your items which you are not using anymore that is worth something- clothes, books, dvd, extra appliances, etc.
- Stash your Bonus – your Christmas bonuses or 13th month pay is a bonus you should pay yourself. Don’t spend it even before you receive it.
- Change a Habit – pack your lunch, commute, cook dinner for friends instead of going out on a Friday night.
When you make a conscious effort to save for your emergency fund, it is not yet of any worth until you actually put it in your emergency “no touch” account. Separate it and don’t mix it in your monthly income to make sure that you don’t spend it.
Q&A
Raine of Cavite asks:
I’m planning to check employment prospects for me abroad. Do you suggest that I withdraw my buffer fund that’s good for 3-months or do I just leave it in the bank?
Kendrick answers:
What’s the percentage of you getting hired?
The last thing that we want to happen is withdrawing that emergency fund, going there and looking for employment and unfortunately, you don’t find any. You go back home, you don’t have any job, and you don’t have any cash.
Below is the youtube video for this episode:
[youtube] http://youtu.be/U3z-S27kV6A[/youtube]
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Happy Investing!