Build Financial Freedom: How to Start an Emergency Fund

Published: August 7, 2020 | Updated: October 12, 2020 | Posted by: Ricky Publico | Personal Finance

Emergency Fund 101: 5 Ways Filipinos Can Build One | Moneymax

By now, you already know the importance of setting aside money for your savings. But what about an emergency fund? Aside from saving for the far future, it’s also advisable to save money for emergencies in the near future. You might end up with a medical emergency or you might end up losing your job. It’s always best to prepare your wallet for the worst.

Admittedly, it’s going to leave yet another dent to your wallet, but you’ll be getting financial security in exchange. If you didn’t know about this type of savings fund, you’re not alone. More importantly, it’s not too late to build one. Get started with your own rainy day fund with these helpful tips.

What is an Emergency Fund?

An emergency fund is a readily available source of cash for unforeseen expenses or situations. Separate from your savings and investments, it allows you to prepare financially for events like unemployment, medical emergencies, home, and car repair, etc. That’s why it’s also called a rainy day fund because you never know when it will rain—just like you never know when a financial crisis will come.

How Much Emergency Fund Do You Need?

The general rule of thumb for building an emergency fund in the Philippines is to save an amount equivalent to your salary for three to six months[1]. That should cover medical fees, car repairs, daily expenses brought by unemployment, and other emergency situations. And before you ask, buying new clothes or gadgets doesn’t count as an emergency.

Why Do You Need an Emergency Fund?

emergency fund - why do you need one?

For when you or your loved ones get sick

Any medical situations, from a runny nose to severe operations will cost you money. Not all companies in the Philippines offer sick leaves or medical assistance when their employees need it. But when they do, it’s always subject to your severity and will not cover all your expenses.

Some offer a maximum amount of health and medical coverage or most of these HMOs will not cover the expensive medicines. It’s always a case-to-case basis. If you have an emergency fund, you don’t need to stress yourself out. It can cover your medical expenses while you wait for your insurance provider to reimburse you.

For when you lose your job

If your job is your main source of income and you lost it during the pandemic, you’ll wish you had money stored somewhere. The ugly reality is that when you lose your job, your utility bills won’t stop knocking at your door. But not of course if you have an emergency fund that will help you bridge the gap to your next employment.

For when you need to repair something

Whether it’s a flat tire or a broken phone, you’ll need to shell out money to have it repaired. Automobile, home, and other types of repairs never come cheap. But if you prepare yourself for emergencies like these, it would be a tremendous relief for you and your personal belongings.

For when you have an unforeseen expense

You have to prepare yourself for the unexpected. It doesn’t have to be a negative emergency, either. What if you need to fund a surprise family trip? What if you need to buy wedding gifts for your friend who’s about to get married tomorrow? What if you need to buy furniture for your new apartment? Always be prepared because after all, life can surprise you in more ways than one.

Read More: Are You Willing to Spend your Personal Emergency Fund for Others?

How to Start an Emergency Fund in 5 Ways

Adjust Your Monthly Budget

emergency fund - adjust your budget

As mundane as it is, creating a budget is always an essential step in making any financial decision. If you haven’t already, start the culture of creating a budget every month to help you manage your money better. But if you’re already following your own, adjust it so you can find room for your emergency fund savings.

If possible, prioritize your emergency fund the way you prioritize your savings. If your current budget can’t accommodate it, start trimming some expenses. Try to explore ways to save more like cooking meals at home instead of eating out, carpooling instead of using expensive ride-hailing apps, or unsubscribing from streaming services.

Read more: 8 Signs You’ve Reached Financial Adulthood in 2020

Aim for a Lower Initial Amount

While a standard emergency fund should support you for three to six months, it doesn’t mean you need to aim for a high amount straight away. If you’re just starting your rainy-day fund, try setting a low target that is reachable in a short amount of time. You can even use an emergency fund calculator to help you determine the right initial amount for you.

You can initially start building your rainy day fund at PHP 10,000. If you’re receiving PHP 25,000 every payday, you can set aside PHP 2,500 and reach your goal in two months. Once you get the hang of it, try raising your goal so you can build up a higher emergency fund savings. That way, you’ll be able to secure your immediate future without starving yourself financially.

Read more: 55 Tips on Saving Money: The Ultimate Financial Hacks List 

Cultivate a Culture of Saving

emergency fund - cultivate a culture of saving

It’s not enough to make saving money a habit. You have to integrate it into your way of life. Experts say that you have to do something for 21 days straight before it becomes part of your system. So for the next few days, try incorporating money-saving activities in your routine like comparing prices, packing lunch for work, conserving energy, and others.

Take it up a notch by getting your own piggy bank where you can store coins and smaller bills. This helps highlight how small investments can lead to big returns in the future. You can also start recording on a money management app where you can log your spendings, daily and monthly budget, and the computation of your emergency fund savings, among others.

Read more: 7 Money Challenges to Help You Hit Your Savings Goal

Don’t Pressure Yourself

All of these savings talk can definitely overwhelm some people. That’s normal, but always remember that you don’t have to suffer just to save money. You’re still free to splurge from time to time, within your means of course. Starting a rainy day fund is just you setting up a safety net for when you can’t sustain your way of life anymore.

You don’t even have to set a specific amount for your fund. “Start stuffing whatever money you have into that cushion,” financial blogger Trent Hamm said in his blog[2]. “Even a small emergency fund will make a difference.” If you don’t want to follow the standard three to six month rule, set your own standards. As long as you’re making an effort to save, you’ll be fine.

Read more: 5 Best Ways to Grow Your Extra Savings

Avoid Spending It

emergency fund - save your money

Once your emergency fund starts growing, you might be tempted to spend some of it and justify that you’ll return it the next payday. As much as possible, don’t stifle its growth by spending it on non-emergency purchases. Once a real crisis emerges, you’ll be glad you kept your urges at bay because now you have enough money to take care of it.

To further prevent you from using your rainy day fund, automate the process of saving by using an automatic savings program. You can also go old school with it by keeping your fund inside a personal vault. It’s important to limit your access to your emergency fund, but not too much that you won’t be able to use it when an emergency comes.

Do You Really Need An Emergency Fund?

Some people are actually torn about the importance of an emergency fund. Financial expert Randell Tiongson believes that having one is essential. “It is foolish to think that we will never undergo an emergency in life, and most of the time emergencies cost a lot of money,” he said. Tiongson also recommends having three to six months’ worth of expenses saved up[3].

emergency fund - do you need emergency fund

On the other hand, Lisa Aberle from Get Rich Slowly argues that you don’t need an emergency fund when you know how much you’re spending on a regular basis[4]. “You begin to see trends in your spending that can help you plan even better for the future. Everything becomes more predictable,” she says.

While both sides make valid points, there are some indicators that will help you decide if you need an emergency fund or not. If you have all of these, then building an emergency fund becomes optional.

  • You have very little, or no debt to speak of
  • You have more than one source of income
  • You have adequate insurance

But even if you are financially secure, having an emergency fund wouldn’t hurt. Emergencies happen when you least expect it—even if your expenses have become predictable. And if you’re like most Filipinos who live with their extended families, it will be hard to predict your monthly expenses anyway. It’s always useful to have a rainy day fund for everything unexpected.

Final Thoughts

Of course, your emergency fund won’t grow overnight. You have to start somewhere and there’s no better time to start than right now. As long as you have the willpower and discipline to two types of saving funds, you can take care of any crisis from now on, regardless of urgency. Start building your own emergency savings today and take one step closer towards financial freedom.

emergency fund - personal loan cta