Why is an Emergency Fund Important?
You love travelling. One of your family traditions is travelling to with your friends to Palawan during the summer. At this time of the year, your wallet is stretched from your travel expenses, and don’t forget adding in the beach wear clothing you’ve had to purchase prior to the trip. Unfortunately, bad luck strikes this year. A few days before your trip, you accidentally dropped you phone and it’s LCD is cracked. You need P5,000 out of your pocket for repairs… but, it’s not even readily available. Then you wish, at that very moment, you should have kept an emergency fund. Unfortunately, you did not. So, what now?
Why do I need an Emergency Fund?
A big aspect of responsible financial planning is being able to keep an emergency fund, because let’s face it, we’ve all been through unforeseen situations that cost us a fortune or some. Emergencies come in all shapes and forms. It could be as small as a bathroom leak or something as expensive as paying a few thousand dollars for medical treatment.
These scenarios are difficult and costly. Being proactive and preparing for these times by keeping an emergency fund can save you all that financial burden and stress. Emergency funds exists to ease your financial burdens. But keep in mind that the purpose of your emergency fund is not for travel or leisure. This is your safety nest and should only be used for real emergencies.
Short Term Emergency Fund
Short term emergency funds are easier to save up for and should be one of your first steps when building emergency funds. You can use this fund for things that need immediate attention, like renovations required to fix a bathroom leak or any other small but unexpected repairs to be made to your home. By keeping at least $10,000 in your bank account, you can easily get the work done and move on, saving you all the unnecessary stress.
You should ensure that you are able to access your short term emergency funds as soon as you need them. This means you have instant access and would not require a day or two to get to you. One of the best forms of an emergency fund is a checking account, where your money is not only secured and FDIC insured, but can also be accessed immediately as soon as you need them.
Long Term Emergency Fund
The purpose of long term emergency funds is to ensure that you have financial support when large amounts are required for unforeseen or unfortunate events. When you are prepared, it is less likely to cause financial stresses and you can get on ahead and move forward. When deciding how much to save up in your long term fund, as a general rule of thumb, the amount should equal six months of your expenses. Expenses include rental payments, water and electric bills, food, medical expenses and transportation.
You need to have discipline to be successful with building a long term emergency fund. Ensure that these funds are reserved only for real emergencies and not used for other expenses. Do not place your funds in investments that are high risks. You can however consider low risk investments and make sure that your funds are readily accessible.
How to Build Your Emergency Fund
Check Your Budget: List all your necessary monthly expenses. Make a note of any debts that need your immediate attention and need to be paid off first. Also, consider any imminent emergency situations that you might experience. Does your car need any repairs? Do you need to go see the dentist for service that isn’t covered by your insurance company? Do your parents need financial assistance?
Track Your Spending: It’s amazing how much money we “unconsciously” spend on unnecessary items. Consider tracking your monthly spend and cut out the ones you can do without. Whatever amount you spared from spending on anything you don’t need can be set aside for your emergency fund. Remind yourself to contribute into your emergency fund each month on a regular basis.
Be Prepared: Once you have a solid plan, next step is to execute. Set a checking account if you already don’t have one. Ensure that your funds are instantly accessible. Determine an amount for your funds and set this as your goal.
Congratulate Yourself: Congratulations! You’re a step closer to financial freedom and independence. Make sure that every time you achieve your goal and milestone, you give yourself a little token for a job well done.
If You’re in Debt
There are a number of Filipinos who, unfortunately, are struggling with debt. If you are one of them, there are a few considerations to make, before you can proceed with saving up for an emergency fund. To get ahead with managing your debts, make it a priority to pay off the following debts:
1) BIR tax
2) High interest loans
3) Credit card balances
These types of debts can cause serious financial damage if they are not carefully managed and paid off. Although emergency situations require funds, you can only make contributions if you are out of debt or are managing them properly. Once your debts are manageable, then you can go ahead with saving up for emergency funds.
However, if you are unable to manage your debts and feel that you are drowning and need immediate help, consider hiring a professional with expertise in debt settlement and offers tax solutions services. You will be guided on how you can manage your debts especially tax debts and unsecured debts.
Be proactive. Take control of the situation and speak to a professional so you can be on your way to great financial results. Don’t hesitate to start today!