Life is full of surprises, some more pleasant than others. You may not know what will hit you and when, but how hard it hits may depend on your preparedness. Having the financial means to tackle unforeseen expenses can ease life's blows, ensuring you navigate the rough patches with greater ease and resilience.
It is why having emergency funds readily available for any eventuality is crucial.
What is an emergency fund?
You may be used to budgeting for things you plan and expect, such as trips, school tuition, and even long-term goals like retirement. But what happens when a wrench gets thrown into your plans? What if you lose your job, someone got sick, or your house burned down?
These are what emergency funds are for. An emergency fund is the money you set aside to pad yourself financially to help brace for the impact.
Emergency fund examples
Here are some examples of emergencies you may need to save up for:
- Automobile repairs
If you own a car or any motor vehicle, having an emergency fund can alleviate the stress of possible breakdowns or maintenance fees.
- Medical bills
Nobody wants to get sick or go through surgery. Staying in a hospital can make a huge dent in your savings. An emergency fund can help mitigate medical bills.
- House repairs
In the Philippines where heavy rains, floods, and fire are unfortunately common, preparing for the consequences of natural disasters is only good sense. Apart from this, homes already require regular maintenance or renovation.
- Job loss
While you're employed now, the future job market and economy are unpredictable. Recent events, like the pandemic, showed how changes can lead to widespread layoffs. It's smart to be prepared. Having an emergency fund ensures financial stability if you ever lose your job or face income disruptions. It's a straightforward way to stay resilient in the face of an uncertain professional landscape.
How big should your emergency fund be?
The general guideline is to maintain an emergency fund equivalent to three to six months' worth of living expenses. The amount you need depends on the scale of emergencies you want to handle. A three-month fund should suffice if you're preparing for smaller issues like car repairs or minor health concerns.
However, the goal is to be ready for more significant emergencies. For example, having half a year's worth of living expenses ensures a financial cushion if you lose your job or need to shut down your business. This extended buffer provides ample time to explore new job opportunities.
Moreover, a six-month emergency fund enhances your ability to manage substantial hospital bills for severe illnesses or injuries and tackle major house repairs. It's a practical strategy for securing your financial well-being against unexpected challenges.
How to start an emergency fund
Accumulating a significant amount for your safety net might appear challenging initially, but careful preparation can make it a feasible goal. You can't build a nest egg overnight: it demands time, patience, and financial discipline. Here are some proven methods to save money for your emergency fund.
- Set aside money from your monthly income
Determining how much of your regular income to allocate for emergencies is a personal choice. After all, you may be planning for other things right now – a wedding, a trip out of the country, your own pad, or a new car. However, remember that the bigger the amount you set aside for emergencies, the sooner you will reach your target emergency fund.
If you want a larger savings buffer, setting aside a larger sum each month could help you reach your goal faster. If this means tightening your belt for a few months, then it may all be worth it in the long term.
- Earn extra income
Building an emergency fund can be challenging when you earmark most of your monthly salary – say, 80% or more – for expenses. Recognize that emergency funds are just one facet of your overall savings strategy. While everyone aspires to save for dream ventures like a house, vacation, or wedding, relying solely on your regular income may not cut it.
Consider exploring additional income streams beyond your 9-5 job or primary business. A side hustle, perhaps an online part-time gig that doesn't demand excessive time, could be a game-changer. Even launching a small home-based business can provide extra earnings, offering you the financial boost needed to fortify your emergency fund.
- Save your bonuses
Does your company provide additional bonuses on top of the mandatory 13th-month pay? These bonuses can expedite the growth of your emergency fund. For example, a two-month bonus could take you one-third toward your six-month target. Utilizing such rewards can serve as an effective kickstart to initiating and bolstering your emergency fund.
- Try insurance and medical plans
Putting some of your earnings in medical and insurance coverage plans can be an effective way of at least having built-in emergency funds for potential health emergencies. You can be covered for future hospitalizations and even different types of illnesses depending on how much premium you are willing to pay. Check out MCBLife, Chinabank’s bancassurance venture with Manulife, which offers a range of insurance products from health protection to retirement.
- Start your investments
If your goal is to establish funds for a broader range of potential emergencies, an effective strategy is to let your money grow in trusted financial institutions. For instance, Chinabank offers various products designed to assist you in saving for your emergency fund. Exploring such options can be a valuable step toward securing your financial readiness for a wide array of unexpected situations.
So, where can you invest your emergency fund? Chinabank has term deposits that offer higher interest rates than a regular savings account. The longer you keep your money there, the higher earnings you will get on your initial investment. Chinabank also offers Unit Investment Trust Funds (UITFs), which give you the option of allowing professional fund managers to maximize returns on your money and balance any risk.
If you have a considerable amount of money to use as an investment, then you can build your emergency fund by choosing the right investment product.
Where to keep your emergency fund
The best banks can also help you keep your hard-earned emergency fund. Where you keep your emergency fund is as important as how you build it, and Chinabank has earned a reputation as one of the most trusted names in banking for over a century, ensuring that your funds are always kept safe and secured.
Aside from using a reputable bank for your savings, here are other tips to help you maintain your emergency fund.
- Always replenish
When you use up some or all your emergency funds, you should always work on replenishing them. It doesn’t have to be right away but having the experience of building it in the first place should give you confidence that you can do it again by applying the same strategies, patience, and discipline.
- Never use it for other big purchases
There’s a reason it’s called an “emergency” fund. You only break the glass, so to speak, in case of emergencies; not because of a sudden urge to splurge. Remember, your emergency fund should always be there because you’ll never know when you’ll need it.
- Compartmentalize your funds
You should save for different things, anyway. A vacation fund should only be a vacation fund. If you want a new cellphone or laptop, then you should set aside different savings for that. Compartmentalizing your savings helps you save up enough money for the things you plan, which ensures that you won’t need to dip into your safety money.
Building and keeping your emergency fund is all about being responsible with your hard-earned money. With the right discipline and strategy, you can save up and maintain enough money to keep you afloat in times of need.
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