The Importance of Having an Emergency Fund

Sep 4, 2019

It’s always important to set aside a fraction of your savings for any emergency purpose. Your future self will surely thank you if you have enough cash to pay for unexpected needs in the home, an urgent repair, or something more serious like unemployment, a calamity, or a medical emergency. It’s one of the most important things you need to save up for as an adult.

So, what’s an emergency fund?

An emergency fund is money set aside for unforeseen expenses. There’s no fixed rule on how much it should be, but it should be able to cover your major expenses for three to six months. This pool of money can spell the difference between a small bump in your finances and a total wreckage on your monetary situation – and probably your entire life.

In short, it’s a form of liquid insurance; one that can insure your safety against life’s unpleasant surprises. You surely don’t want to live paycheck to paycheck. You probably dread not being able to pay rent. You maybe do not want to pay for exorbitant repair fees when you figure in a car accident, nor do you want to stay in the hospital for long because you’re missing the amount you need to get yourself out there. Having the needed funds when these situations arise will give you peace of mind, for sure.

Say, you want to move out because of a family problem. Or maybe you got terminated from your job and you weren’t getting the right compensation because the company you work for wants to save up and couldn’t justify the amount due you. An emergency fund will give you the freedom to move on and do what you want.

Keeping this pool of money separate from your other expenses like your rent or your bills will prevent you from touching it until you actually need it. You’ll be able to avoid temptation and become a little less reckless with how you spend your money.

What qualifies as an emergency?

An emergency would keep you financially afloat when you’re in between jobs, undergoing a massive car repair or home repair, when you’re recovering from a calamity, and during a serious medical situation. An emergency should not include expected expenses like a vacation, a new business venture, an iPhone upgrade, Christmas gifts, or a shoe shopping trip. If it’s not something that you would set aside a budget for ahead of time, it doesn’t qualify as an emergency.

How much should be your emergency fund?

As mentioned earlier, your emergency fund should last you from three to six months. It may sound a lot, but this can be your most basic expenses. For instance, if you lose your job, you should be spending a lot less compared to what you were spending when you had money coming in constantly.

You should calculate the following:

Your monthly rent

Your utility bills
Your monthly commitments like car payments, insurance, loan repayments
Your food or grocery expenses

This, of course, shouldn’t include your movie date budgets, clothing expenses, and money for eating out. Even then, the budget can add up to a lot especially when you look at the time frame involved.

But there’s a trick, er, a more practical way to accumulate the money for your emergency fund without breaking an arm and a leg. Do it little by little!

You don’t have to do it at once. Set a reasonable amount of time to get to the higher end of the “required” months (six months). Don’t take too long though, because an emergency can happen anytime, and therefore, growing an emergency fund should be your top priority.

Let’s say your goal is to have PHP 100,000 in your emergency fund. This means your expenses is about PHP 17,000 a month. If you save PHP 4,000 every month, you’ll be able to build up the fund in two years, and that’s fine as long as you commit to saving that amount until you reach your target.

If you can throw in an extra PHP 1,000 each month, then do it! If you get extra money, for instance, when you get your 13th month pay this Christmas, or if you get a raise, or a monetary gift on your birthday, then add it to your emergency fund. Anything that could help you get to your desired amount faster would be beneficial.

Growing your emergency fund

If you want to get to your goal faster, you need to make more money. There are different ways, but that’s for another blog topic altogether. But to go through these suggestions quickly, below are some things you can explore:

Spending one or two evenings a week driving for Grab
Becoming an online seller
Cutting down on your expenses by buying groceries and cooking at home instead of going out to eat
Lower bills by getting shared accounts on Spotify and Netflix – and maybe having your cable disconnected

Where should you keep your emergency fund?

People have varying opinions on where to keep their emergency funds. Some would say it should be in a savings account. Some would opt to keep it in a checking account. Some would even advocate investing your emergency fund. Bottomline is, it needs to be kept in a place where it can be quickly accessed or withdrawn quickly.

What if an emergency comes and you still don’t have the funds?

Emergencies are sometimes inevitable. It can happen tomorrow, it can happen next week, or next month. Who knows? But what if you’re just getting started with building your fund, and you suddenly get into an emergency? What if you need it right now? Have no fear because Blend PH has the solution.

We have several ways to help you get the funding you need, regardless of the emergency you’re in. Call us or get started by signing up on our website.

It’s conventional wisdom – everybody needs an emergency fund, but everything about it is on a case-to-case basis. The minimum amount should be three months, while some would advocate for saving money enough for six or eight months. Some would tell you to keep it in a savings account, some would suggest that you invest the money.

You only need to find your own sweet spot to get started with building your emergency fund.