by Carlo Miguel Castañeda, on category "Personal Finance"
September 8, 2015
You probably already know what emergency funds are. You know that this is money you set aside for when unexpected events, so that your savings or current funds aren’t depleted.
Under most general guides for building an emergency fund, most financial planners will recommend that it should be able to cover your monthly expenses for 3 to 6 months in the event that something should happen. This is also the money that you can use if someone in your family requires emergency care.
You might already be itching to build one, and that’s a good thing. Here’s a few steps you can take to build your emergency fund:
Step 1: Look at your finances
It’s the same system when you’re plotting out your budget. Only this time, you’ll be allotting a specific amount to emergency funds as well. It can look a little like this when you plan your budget:
Step 2: Set your initial target low
Yes, ideally your emergency funds should grow into something that can support you for 3-6 months, but not at the outset. Trent Hamm, founder of the personal finance blog The Simple Dollar, advises that you set a reachable goal for yourself.
So set a low target, like a month’s worth of expenses saved for over the course of three months. On average, a month’s expenses can reach Php 10,000. On a net paycheck of Php 25,000, this can be reached in two months, without making other areas of your life suffer.
Remember that you can always raise your goal later when you’re more comfortable with the amount needed to build it up by that much.
Step 3: Give yourself breathing room
Building your emergency fund shouldn’t be all-consuming, and take away from your savings, or retirement, or the guilt-free spending money. Yes, you are allowed to set aside money each time you get your paycheck to spend on the things that you want.
The upside is that while you can set goals for yourself (as seen in the table above), your funds are malleable. You can redistribute funds from vacations to savings, or from guilt free to emergency, as you see fit.
Step 4: Form the habit
It’s said that you have to do something for 21 days straight in order for a habit to fully form. In the case of stashing away money, you can just as easily automate it. Banks like BPI have automatic savings programs that you can use to stash away your emergency funds and ensure that you cannot touch them at all unless absolutely necessary.
If you’re more old school, you can use jars, lockboxes, or even books to hide your emergency funds. Just make sure that you hide it where you can’t easily grab at it.
Step 5: Don’t even think about touching it
As your savings and emergency funds grow, you may be tempted to add it to your guilt-free money to fuel a shopping spree. Remember that your emergency funds are for an actual crisis – and no, that limited edition gold iPhone does not count as a crisis.
It’s also ideal that you segment your emergency fund when you’ve built a large enough amount. One for minor emergencies – like the replacement of a major appliance (still no on that smartphone appeal); and the other for major emergencies – like job loss, or in case you are affected by a major disaster.
One does not simply build an emergency fund overnight. Like saving, it takes discipline and wanting to be prepared for any possibility, because you never really know what life can throw at you.