Build An Emergency Fund

Last month, we had an emergency.

Financial emergencies happen. It doesn’t matter who you are, how old you are or where you are. They happen when we least expect them. And, they usually cost money.

In this post, we will outline why and how to start an emergency fund.

What is an emergency fund?

An emergency fund is an accessible amount stashed away for emergency use. It will only be used in case of emergencies like job loss, medical emergencies, etc.

Why build an emergency fund?

There are just too many unexpected emergencies that can and will happen in everyone’s life. You do not want to be caught in the middle of it without cash. Here are a few real-life emergencies that have occurred to me and people I know:

• A few weeks ago, Typhoon Ondoy flooded our house and lost almost everything. We had to scurry around looking for food, safe drinking water, and supplies.
• My friend’s grandmother was hospitalized and confined for a few days due to kidney complications
• Another friend had go to surgery for meningitis, quickly followed by surgery for hydrocephalus

These are all emergencies. Unfortunately, many have made the conscious decision not to have rainy day savings. People think they’re pretty safe until they are laid off. Bottomline is, we all need emergency funds.

How much is enough?

One cannot say how much a person would need. Depending on the situation, you may never have enough. However, a good rule of thumb is to have 3-6 months worth of income in the fund. If that is not very realistic in your situation, you may apply these rules:

• If you are an employee with a regular income, you should have 10% of your annual income in savings.
• If you are self-employed or your income fluctuates (through commissions, for example), you should have 20% of your annual income in savings.
• If you are retired, you should have 30% of your annual income in savings. (I’m assuming this means retirement income since if you’re retired you don’t have employment income.)
• If you’re in danger of losing your job, you should have 40% of your annual income in savings.

– How Much Should You Have in Savings?

How to Get Started?

For most people, building an emergency fund is very hard. Simply saving money is hard. Now, we need to save 3-6 months of worth of income? Actually, it is easier than it seems.

• Sell something. Check everything at home. Do you really need all those stuff? If not, sell them!
• Offer services. What are you good at? Do you love cooking? Offer to cook lunch for office mates. Are you good a web design? Check out Sulit and offer your services.
• Lower your expenses. Think of it as a spending transfer. Limit buying and deposit all the savings in an emergency fund.

A few recommendations

• Use it for real emergencies. Christmas and birthdays don’t count as emergencies.
• Don’t touch it. It’s better to put your emergency fund where you cannot easily access it.
• Don’t put it in any investments. You probably know this. Investments can lose money. It’s better to keep it safe in a savings account.

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