AS everyone is globally experiencing firsthand, the Covid-19 pandemic has changed and affected our financial, professional and social environments.
One of the disturbing factors is that most of the items that affect our economic well-being are often beyond anyone’s control. As such, this resulted in a shift of attention to one of the most critical financial lifelines and regarded to be one of the best kinds of insurance: the emergency fund.
The fund was founded in response to a serious, unexpected and often dangerous situation that requires immediate financial action. The current Covid-19 pandemic situation undoubtedly fits the justification of the fund and highlights the need to cushion the negative impact it brings when taken lightly or for granted.
Three of the most critical questions about the emergency fund that requires special attention during these trying times are: What is the purpose of your emergency fund; When can you use it; and, Up to what extent can one use the fund?
Detailed below are the answers to the questions to help cross the state of being in a conundrum.
1. The whole purpose of the emergency fund is to get you through financial hardships.
In the context of the current pandemic situation, these hardships mean job loss, pay cut, decline on demand on the product or services offered and other activities that impact the inflow of money.
When the usual source of income is disturbed, the said fund should be activated to meet your needs, which includes essential expenses, specifically basic utilities (e.g., power, water, etc.), food, transportation, gasoline and housing (rent or mortgages).
It is paramount to keep in mind that the emergency fund is focused on actual financial emergencies, regardless of whether it is a frivolous expenditure. In a nutshell, it is essentially a cash reserve or a buffer that one can use when things are going south financially.
2. Emergency funds are supposed to be used for actual financial emergencies such as salary replacement due to unemployment and other items to support your basic needs such as utilities, rent, and food.
Still, extra layers of consideration and control should be in place before tapping into your lifebelt or lifebuoy, and that is to check on financial tools that are at your disposal.
For example, in the case of retrenchment due to the economic and social pressure the pandemic brings, you need to be aware of your entitlement to separation pay and ensure to claim it. You must also be mindful of the cash aids provided by the government both at the national and Local Government Unit (LGU) levels.
The goal is to exhaust all relief options before using the emergency fund as this should be the last line of defense before opting for a more desperate option of getting yourself into debt.
3. The fund has a rule of thumb that the size should cover at least 3-months to 6- months’ worth of expenses and can go as high as one year, depending on factors like age and lifestyle. Generally, the fund should be utilized in two elements.
The first one is strictly following the duration of your fund, which is assumed to have been developed based on the monthly living expenses, and the other is to recalibrate the budget based on the kind of situation you are facing.
For example, transportation expense would generally be part of the emergency fund to aid you in going to work or in finding other sources of income, but the current pandemic situation where it strictly requires everyone to stay home or at least get some free or discounted transportation services gives you some room or the opportunity to save up instead of using it for non-essentials.
Or this could be an add-on to other needs that require special attention such as face masks and vitamins. Hence, the extent should be on an as-needed-basis with stringent controls to follow the budget created.
The situation is far from normalizing, and the last thing you would want to happen is to end up in a tragedy of errors and end up losing everything you have worked hard.
The situation spells as a perfect time to look into it and modify your financial security, including the objective where it is no longer just hinged to achieve peace of mind, but also to be resilient against what lies ahead in your financial journey.
Earl Pagatpat is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 83rd RFP program this June 2020. To inquire, e-mail firstname.lastname@example.org or text <name><e-mail><RFP> at 0917-9689774.