When you finally land a stable job and live independently, you'll start to notice that your monthly bills are accumulating faster than you can save up money. Especially with this whole pandemic thing going on, it's hard when you don't have an emergency fund that you can pay off a few months' worth of bills or a business that can still operate in a pandemic.
In this blog, we'll tackle the general aspect of building an emergency fund. Let's start with its definition.
What is An Emergency Fund?
Emergency Funds are basically savings that you set aside for a rainy day. Well, not quite literally. These are funds to be used for, well, emergencies. Certain emergencies could be an array of unexpected scenarios such as sudden deployment or unemployment, home/car repairs, and other unforseen events in our lives that require us to pay up front in cash.
Why is an Emergency Fund so Important?
You might ask: "Why not just build another savings account?". Sure, having a savings account in the bank is another way of building a emergency fund. But it's more convenient to pay your expenses instantly than to line up in the bank and fill out a few forms and slips. Because it's emergency fund, you would want a convenient and instant payment method.
It's important to have an ample amount of money safely stored in your home or somewhere else completely.
IMPORTANT: Since these funds create a "financial buffer" that enables you to make ends meet, you might want to avoid using credit cards or loans to pay for your other loans or expenses.
Instead of paying off your debts, your expenses will either double or remain the same. Thus, having an ineffective emergency fund.
We all know what happened during the pandemic. A lot of lives and jobs were lost. With the fast infection rate of the virus, nobody saw a global lockdown coming our way. This opened up a lot of realizations as we stayed at home. Among those were not having an emergency fund or savings account.
How Much Money Do I Need In An Emergency Fund?
There's really no fixed amount of money for this. Most financial experts recommend saving up 3-6 months' worth of expenses for your emergency fund. However, you can go further as 1 year to a few years worth of expenses. The amount of money you should save up also depends on your current life situation. If you're in your 20s, single, have a stable job, and living independently, you might want to save 4 months worth of expenses. If you're in your late 20s to early 30s, married, have a stable job, 2 sources of income, and a child on the way, then you may want to have an emergency fund worth 6-9 months worth of expenses.
Factors to Consider When Building an Emergency Fund
Employment Status (is your job stable? are you currently unemployed?)
Job Salary
Civil/Marital Status
Family (if you send them money back home to support them or not)
Dependents
Medical Conditions
Loans/Debts
How To Build an Emergency Fund?
Calculate Monthly Expenses
The first step in building an emergency fund is to calculate how much you spend every month. Take note of your groceries, food phone bill, Internet expenses, utility bills, etc. Only include the important expenses that you would still pay for in times of an emergency.
So, scratch that expensive bag and limited edition pair of shoes off your list and add in your monthly rent or lease.
2. Set a Goal
Determine the number of months you want to save up for. Given the factors mentioned above, set a clear estimate of the number of months. It's recommend to add an extra month so that you have a safety net.
3. The Formula
The formula for an emergency fund is simple:
monthly expenses x no. of months
For example, PHP10,000 (monthly expenses) x 6 months (no. of months you want for your emergency fund savings). Therefore, your goal to save up is PHP60,000.
4. Saving up
When you're saving up for your emergency fund, decide on how much you can afford to save each month. If your bank app has an automated savings feature, the better. You'd be more motivated to save up once you see your emergency savings grow.
Don't be discouraged when you feel as though your goal seems far away after months of saving up. Stay disciplined in saving your money. It can be tough resisting temptations such as a flash sale or discounted goods, but it's more important to keep yourself and your family safe from an unexpected downfall.
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Handle your finances well especially if you're still young. :)