There’s a general concession that life is full of surprises. In a moment, everything may change—for better or for worse. If it benefits you, you may relish the euphoria of things unfolding and revel in the happiness of the moment. Conversely, you could find yourself so helpless in trying to get everything fixed. Sadly, there are things you may need to sacrifice just to resolve something. In dire situations, you may even be forced to do things you hate doing.
Many people are caught off guard when a financial turmoil happens. In your attempt to look for solutions, you sometimes end up spending hard-earned savings, pull out well-placed investments, or find someone willing to lend you some bucks to get by.
You can prepare yourself to face life’s hitches by building one of the most vital elements in financial well-being—an emergency fund. This is your financial security net, something you can readily tap when a crisis happens. It should be a dependable source of financing when you critically need it so you will not be forced to use your credit cards or avail yourself of high interest-bearing loans. Certainly, you don’t want to find yourself deep in a debt trap.
Here are three things you should know about an emergency fund.
- How much to save?
Financial experts suggest saving at least three to six months of one’s living expenses. It may take time to get there but it’s definitely a good habit. The important thing is to start as soon as possible with what you can afford and build your way out to 5 percent or more of your salary until you reach your goal or the required amount. This is something you need to do, so you must have the discipline to do it. Just like the need to save or invest for the future, creating your emergency fund is equally imperative for your financial well-being. And because it is the foundation toward solid saving and investing, which definitely helps achieve your goal of financial prosperity, building an emergency fund needs to commence as you try to improve your cash flow. A helpful tip is to take advantage of automatic debits/transfers, which can help you set aside a little amount every payday without thinking about it.
- Where to keep your money?
Keeping it somewhere handy (cash on hand) is the most common way to have your emergency fund. You can put this, say, for instance, at home, where it is readily accessible should the need arise. However, some people may have difficulties in consistently saving for an emergency fund or leaving it unused except for its specific purpose. To avoid the temptation of using your emergency fund for your day-to-day expenses, it is suggested that you keep it in a separate account. Consider a savings account, so you have easy access on your cash when you need it. One important consideration where to keep your money is to scatter it in different instruments. This means it should not be put just in one place. Others suggest keeping a little chunk in a money market instrument to gain interests. Yet, it should be noted that cash on hand and savings accounts are still the best way to maintain an emergency fund because they are easily accessible. As the name implies, an emergency fund is mostly needed during emergencies.
- What to use it for?
There is this hard rule—just use it for emergency cases! Use your emergency fund for true emergencies like health expenses, critical home and auto repairs, and for essential expenses after a job loss. Immediate health expenses, be it for you or your family, is one of the best examples where you can use your emergency fund. Your health card may answer this need but you may need to shell out some cash temporarily, and especially if the sickness is not covered by your health card. Be sure to replenish the money that you have used during an emergency. This is important, and everyone should take this seriously.
Remember, life may have unpleasant surprises. But your emergency fund can help you weather an unforeseen event. It can even turn up a potential financial catastrophe into an important lesson. By building a strong financial foundation, you’re more prepared to face life’s uncertainties.
Don-Don Adolfo Crisostomo is a registered financial planner of RFP Philippines. To learn more financial planning, join the 63rd RFP program this July 2017. To inquire, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-9689774.
