Building An Emergency Fund
Is there a sophisticated technology that can predict or give certainty to the future? I am very keen to answer a resounding no. The only thing that is certain is an uncertain future.
Can you imagine one day getting into an accident or some fortuitous event, and you no longer have money or resources left to defray the necessary expenses needed to recuperate or buy the necessities? Just asking this question while I am writing gives me goosebumps.
Given this situation, one rightly feels it is the end of the world or like hell on earth. This is an awful feeling that one, hopefully, never experiences and that is why every Filipino must know and put into practice the habit of setting aside money for unforeseen events.
One must come up with what we call an emergency fund, also known as contingency fund, where you set aside a specific amount of money and entrust this to a financial intermediary as savings and as a shield against such events as layoffs, accidents, and diseases.
How do we intrinsically build an emergency fund? You may have heard of a thousand advices but most are Band-Aid approaches that eventually proved as acts of nonfeasance. Now what I am going to share with you is not a miracle solution, or rocket science, or even a best-selling product, but more about reflection and, hopefully, to influence your behavior.
In building the fund, the process of establishing a compelling purpose is paramount and is actually the first thing that you should do. This should serve as your foundation to give you a good head start and a strong finish. Having a purpose is like building a personal commitment or being steadfast to the concept of an emergency fund.
To further visualize this, an example would be building an emergency fund for the purpose of covering expenses for both mild and ghastly medical issues that are not covered by your insurance. I am pretty sure that no one would want to die early or pass on the burden to someone else—at least if you are not a hypocrite or you are in your right state of mind. In line with this, it should keep you motivated to religiously set aside something for the fund.
Now, after setting your purpose next is knowing or validating whether this is a need or a want. Remember, the nature of an emergency fund is to safeguard and mitigate all of your means to live where in the absence of such would incapacitate you or put an end to your life.
The reason behind identifying whether such is a need or a want is to keep your brain cognizant of the importance on the fund you are building. By nature, humans prioritize and keep what is important and sometimes go the extra mile just to preserve it. This should keep you disciplined and motivated.
The tendency for building a fund with a purpose but satisfies a want is the high probability of corrosion on interest which would eventually again result to dereliction.
After building these two supporting pillars that stimulate intrinsic mindset, you can now go to the technical side where you need to identify how much money you need to raise. At this stage, a lot of forecasts should be made. But one thing you can do to make your estimates more reasonable and logical is to compare it with the market.
Like in our previous example on medical issues, you need to do some research with hospitals, clinics, or other medical-service providers in your area to know the costs and do the numbers. This would serve as your benchmark and, at the same time, your target on the fund you are building.
You might be wondering why this was more on the behavioral aspect and almost none on the cognitive side. The reason is, we human beings naturally hesitate when it comes to finances. Without strong will power, we easily fall back no matter how rich our technical knowledge of finance.
Earl Pagatpat is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 63rd RFP program this July.
To inquire, e-mail firstname.lastname@example.org or text <name><e-mail><RFP> at 0917-9689774.
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