While none of us like to think about emergencies happening, the truth is, they can happen.
A family member getting sick, an appliance/gadget needing repair or replacement, you or your spouse being laid off from work. You just never really know.
There can also be unexpected expenses that can appear without warning, and without an emergency fund, how can you cover them?
Last month, all of the above happened to my family.
- My mother-in-law went through a surgery due to her diabetes on January 1st.
- My husband’s computer monitor (which he uses for work) suddenly went black and needed replacement on January 10th.
- My husband was eliminated from his position without warning on January 20th.
When the first two emergencies happened, we weren’t that worried because we had some emergency fund savings to cover the unexpected expenses, and John had a regular income from his job.
But when my husband woke me up in the middle of his shift and told me he had lost his job, the panic set in immediately. With a family to support and his income paying 80% of our expenses, it was impossible not to feel the wave of fear wash over me.
Once the dust settled, the panic eased some when I reminded myself that we had an emergency fund in place for sudden and unexpected things like this.
I knew we had enough money in our emergency fund to buy us some breathing room for the next 2-3 months while we figure things out and to fill in the gaps when we we are short while moving forward again.
The feeling of security that our emergency fund provided is exactly why it’s so important for everyone to have an actual emergency fund.
What if you lose your job tomorrow?
Think about it. What would you do if your income went away tomorrow?
My husband never expected that he’d lost his job that Tuesday morning. He’s a hardworking, honest, and dedicated employee. When the company hired him early last year, they offered him a long term employment with a good salary package. Yet, all of a sudden, he found himself jobless…
Emergencies can happen just like that. By nature, they’re unexpected, but they’re not uncommon.
Thankfully, we had our starter emergency fund there to pull from, but if we hadn’t, we might be forced to charge up our credit cards, take out a loan or borrow money from a friend or family member to pay the bills and other expenses.
While an emergency fund won’t solve all your money problems, it’s a great start to getting your finances headed in the right direction.
Today, I’m going to share with you what an emergency fund is and how you can get started saving for your own emergency fund.
What is an Emergency Fund?
An emergency fund is money you set aside for life’s unexpected events or unforeseen expenses. It can be a medical expense, a major home or car repair, unemployment, etc.
An emergency fund creates a financial buffer that can keep you afloat in a time of need without having to rely on credit cards or high-interest loans.
It’s a financial safety net — a rainy-day fund — so you don’t have to tap into your home equity or withdraw money from retirement savings or the kids’ college funds to pay for that unexpected car repair.
Why do you need an Emergency Fund?
You may think your job is secure or you’re in a high demand field in which you could quickly find a new job.
Unfortunately, everyone will likely face at least a few financial emergencies in their life.
You don’t know what’s going to happen, therefore, you need to have an emergency fund.
Having an emergency fund gives you peace of mind. No one wants to live one paycheck away from not being able to pay the rent or utility bills.
It also gives you some freedom. If your your job becomes so unbearable that you have to leave before finding another or you want to go back to school or start your own business, having an emergency fund gives you the freedom to do those things.
How much should your Emergency Fund be?
Ideally, your emergency fund should be 3 to 6 months of expenses.
That sounds like a lot and it is, but keep in mind, that number can be your bare-bones expenses. If you were to lose your job, your spending would be different than it is when you have money consistently coming in.
The number you use to calculate your three to six months would include expenses like rent, utilities, car payment, food and groceries, etc. It does not have to include eating out, entertainment, clothing expenses or saving for retirement.
Even still, 3-6 months of basic expenses will still add up to thousands of pesos for most of us so it can be daunting to save up that much. But you don’t have to accumulate it all at once.
Set a reasonable time frame to get to the three-month or six-month number. Don’t give yourself too much time though. Growing your emergency fund should be a priority.
Let’s say your ultimate goal is ₱60,000 for your three-month emergency fund. That means your bare-bones expenses are ₱20,000 a month.
If you save ₱5,000 a month, it would take a year to reach that number. That’s a reasonable timeline as long as you are saving that ₱5,000 every month.
Remember though, this is a priority. If you can throw an extra ₱1,000 a month in there, do it. Or you can use any “extra” money you get, a bonus, a raise, monetary gifts, to help you reach your number faster.
If your current budget only allows you to save ₱500 a month, then save that. It is better than not saving anything.
Where should you keep your Emergency Fund?
The best place to put your emergency savings is in an account that is safe (as in low-risk), accessible and earning the highest possible interest rate.
- Accessible, but not too easy to access
When you need cash fast, you don’t want to have to jump through a bunch of hoops to get to it. It should be liquid, meaning you need to keep it in a place where you can get to it easily and quickly.
At the same time, your emergency fund shouldn’t be too accessible. A little inconvenience creates a nice barrier to spending this cash thoughtlessly, which is why it’s a good idea to keep your rainy-day fund separate from the cash you tap for everyday expenses. Even better if you put it in a completely different bank or financial institution.
The best option is a simple savings or checking account that comes with a debit card. That way, you can pay that car mechanic quickly and with no headaches.
You should still keep some cash truly accessible for unexpected and immediate needs.
- Safe from potential losses
Your emergency fund should be there when you need it. So let’s take investing your emergency fund in the stock market off the table.
Why? Because the market’s sometimes wild short-term fluctuations make it just too risky. Plus, you don’t want to be forced to sell an investment you planned to hold for the long-term.
But don’t let this scare you off of investing entirely. You absolutely need to invest in the stock market for long-term goals like retirement and kids’ college fund.
- Earning a respectable interest rate
Scoring high returns shouldn’t be your primary emergency fund investment goal. But there’s no reason to settle for the paltry 0.25% per annum interest rates you’ll get in a traditional savings or checking account.
You can do much, much better — and tick the “accessible” and “safe” boxes, too — with the account types below. But please, do your research first before putting your emergency savings into any account.
My Top 5 Options:
- BPI Save-up Account – offers 0.125% per annum interest rate, but it comes with a FREE Accident and Life Insurance worth 5x your average account balance, up to PHP 2 Million.
- Cooperative: BCC’s Regular Savings account offers 1.5% interest rate per annum.
- Digital Bank: CIMB, ING, etc. – offers interest rate of 2.5% p.a. for an available daily balance of PHP 20M or lower.
- Money Market Fund: BPI, BDO, Security Bank, etc. – inquire at the bank for interest rates
- Regular Bank Savings or Checking Account – offers interest rate of less than 0.25% p.a.
In our family budget, 70% of our emergency fund is in our BPI Save-up account; 20% in BCC; and 10% cash.
I’m also considering digital banks and money market funds, but I still need to do my research.
5 Steps to Start an Emergency Fund
Step 1: Make a Budget
Get a piece of paper and write down how much money comes in and everything you spend money on every month. Be sure to include recurring expenses such as your rent or mortgage, utility bills, and estimates of other out-of-pocket expenses.
You can download my free budget template by clicking the image below.
An emergency fund should cover three to six months’ worth of realistic living expenses. If you have nothing saved, you can start with a goal of ₱10,000. Something is always better than nothing. After you hit your goal amount, keep saving until you can cover six months of living expenses.
Step 3: Develop a plan to start saving
Part of your plan may include specific and measurable targets to work toward. Look at your budget and decide on how much you can afford to set aside.
For example, one specific goal may be to save an extra ₱1,000 over the next 12 months to put into an emergency fund.
Step 4: Decide where to put your emergency fund
Know your options and open a separate account for your emergency fund. Remember, your emergency savings should be easily accessible when you need it, but not too accessible to use for unplanned or unnecessary expenses.
Step 5: Stick to your plan
Once you’ve created your plan, make sure you stick to it. This can sometimes be the hardest part of saving for an emergency fund or any financial goal in general. If your goals are realistic and attainable, sticking to the plan will be much easier.
A good way to stay on track is to save automatically. Set up a systematic transfer from your regular savings or checking account at your bank. Be sure to keep your rainy day funds separate from your other accounts, and label it “for emergency use only.”
Just writing down an account’s purpose can keep you from spending the money for any other reason.
3 Ways to Build Your Emergency Fund Fast
1. Sell things you no longer use
Do you have a bunch of unused stuff lying around the house? Sell them! Offer them to your friends or sell them on Facebook Marketplace.
Selling some items that you no longer use can add up to your emergency savings.
And every little bit helps! You’d be surprised at how quickly ₱100 here or ₱500 there can add up. Plus, you’re doing some decluttering at the same time. It’s a win-win!
2. Get a Side Hustle
Take on a part-time job. Start a side business. Offer to tutor your neighbor’s daughter. Look for freelancing opportunities on the internet. Start baking and offer it to your friends and relatives.
It’s little things like this that can really help you stack extra cash fast!
Or, if you love writing like me, you can start your own blog and earn from it eventually. You can also create a YouTube channel and start sharing a hobby you’re passionate about like gardening, woodworking, teaching math, etc. Some YouTubers have successfully turned their hobbies into a full-time business. Who knows, maybe you can do the same too.
3. Adjust your budget
Take a look at some of your categories and move money around to increase your savings, if only for a few months to reach your emergency fund goal.
Cut out the unnecessary expenses. You definitely do not need to buy a coffee/milk tea or go out for lunch or order food online every single day.
If you are a shopaholic, try putting the breaks on the shopping trips while you save up. You may even end up getting control of your spending habits while you are at it.
Put any extra money you receive such as a tax refund, a bonus from work or money received as gifts directly into your emergency fund before you have a chance to spend it.
It may be challenging at first, but I know you can do it. I believe in you! You’ll thank yourself later for being diligent and disciplined in saving up for your emergency fund.
We never know what the future holds for us, so it’s always best to be prepared. Having an emergency fund is extremely important so you’re always prepared to deal with what life brings—good or bad.
There is nothing like knowing that you’ll have a plan already in place should that happen. Just like when a storm is coming and we stock up on food and water – it is important to be prepared financially as well.
Let’s learn from the ants that store up their food in the summer for when the rainy day comes.
Ants are creatures of little strength, yet they store up their food in the summer. –Proverbs 30:25
Money is important but let us not forget that true security can only be found in Christ. We need to put all of our trust in God, and not in money. It’s also important that we be good stewards of what he’s given us.
Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment. Command them to do good, to be rich in good deeds, and to be generous and willing to share. In this way they will lay up treasure for themselves as a firm foundation for the coming age, so that they may take hold of the life that is truly life. –1 Timothy 6:17-19
It’s been almost a month since John lost his job. With an emergency fund in place, and by God’s grace, we’re still able to pay the bills and cover our living expenses. He’s actively looking for a job and we’re continuously praying that he’ll find a good earning opportunity very soon.
If you don’t have an emergency fund yet, it’s a good idea to make it one of your highest savings priorities this year.
If you already have an emergency fund in place, I’d appreciate it if you could share with us your tips on how you saved up for it in the comments section below.
Thank you for your time reading. I hope you learned something from this post and I pray that God will bless and prosper you.
Image credits: CSG Womens Thermals