Creating A Safety Net
Emergency fund is safety net that will catch you in case you fall in times of financial crises. It is a backed up fund always ready to help you in times of need.
There is a saying that I always hear in our society that I ponder a lot:
“Expect the unexpected.”
It is a saying that would greatly affect the major aspects of our life in any angle. It may be emotionally, spiritually, mentally, physically and financially. In our society, the unexpected that would greatly affect our lives are loss of job, death of any members of the family, significant medical expense, home repairs, auto repairs, sudden need for school expenses for the kids, and more in the nature of emergencies.
I had a chance to have a long chat with an old friend of mine. It has been like 10 years since we last met. He has now a growing family with two kids. After a long chat I asked him, with your growing family, is your savings account intact for any emergency that may happen to your family? He replied with confused eyes and shook his head and said no. He remembers having to borrow money always from his parents, he added. I felt really terrible because I am a financial planner and was not able to give him some insights about personal finance and, especially about emergency funds. It took us awhile to discuss how to help him handle his personal finances and to change his views or ideas about money.
What is an emergency fund?
From Investopedia, an emergency fund is an account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. The purpose of the fund is to improve financial security by creating a safety net that can be used to meet emergency expenses as well as reduce the need to use high-interest debt, such as credit cards, as a last resort.
For me, an emergency fund is safety net that will catch you in case you fall in times of financial crises. It is a backed up fund always ready to help you in times of need. It is your friend that you have created and not your enemy.
How do you create an emergency fund?
Starting to create your emergency fund can be easily said but challenging to do. First, you need to sync it with specific goals. Second, you need to compute your average monthly expenses. This is the part that you really need to be as accurate as possible because even a small error really affects your fund. Third, most registered financial planners will advise you to have a minimum of three months and maximum of six months expense as your emergency fund, e.g., if your monthly expense is P10,000 a month then your minimum should be P30,000 and maximum of P60,000. Make sure you have three to six months worth of emergency income available for these needs. This is the most challenging part because the moment you separate this money from your emergency fund, this creates conflict, a battle to save it or to spend it. I usually advise people to start small, like saving P100 per payday then slowly increasing it to achieve the target.
Where to keep your emergency fund?
A good way to start your emergency fund is through a savings account in a bank. It is suggested also to have it in an automated teller machine (ATM) for convenience in case of emergency, particularly at night. Banks are not open at night but their ATMs are always online. And an ATM is simple to use and generally does not cost anything. In case you need to spend more than P100,000 at once, it is best open an entirely separate account. This is for security purposes. Also, as your interest earnings grow, you have it transferred to your long-term investment fund (long-term savings fund will be discussed in my upcoming articles).
Things you do not want to do with your emergency fund?
Most of us confuse this fund with the regular savings account. Usually we are tempted to spend on our wants. Again, this fund is for emergency purposes only. It is important to keep this emergency fund in a security that is fairly liquid so that you can get to the money quickly and easily in the event of an emergency. Also, we often fail to recognize that this is not a fund for the stock market or for mutual fund investments because fluctuations in the market could cause you to lose your money.
Serge Bargayo is registered financial planner of RFP Philippines from Cebu City. He specializes in Personal Financial Planning who help individuals (especially breadwinners) mapping customized solutions for their financial puzzles and achieve financial peace.
Source: http://www.businessmirror.com.ph/creating-a-safety-net/
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