Life has a lot of uncertainties. You may not know that one day you’ve been hit by a calamity, you had an accident, you suddenly became ill, or your house got burned.
In these circumstances, you need to be prepared. In personal finance, it is often called “saving for the rainy days”. These savings is often called emergency fund that is often used when we encounter emergency situations.
WHERE SHOULD YOU PUT YOUR EMERGENCY FUND?
Since emergency funds are savings that should be used anytime you encounter an emergency situation, you should put it in a type of investment that is liquid, safe, and don’t have long holding period. We say that an investment is “more liquid” if it’s easily converted into cash. What are these types of investments?
ATM Savings Account - You can put your emergency fund by opening a regular savings account in a bank that is accessible through ATM. Choose the bank with the most number of branches so that you can almost anytime access your emergency fund when the need arises.
Passbook Savings Account - Alternatively, you can also use a passbook savings account to lessen the temptation to withdraw your funds just anytime you want since withdrawing from a passbook account is not as convenient as compared to an ATM account. You might want to open a passbook account with a bank that is nearer to your place and provides the highest interest.
Time deposits - If you are looking for a type of investment that can provide higher interests for your emergency fund, then you might as well consider time deposits. Just remember the holding period. You should consider the time deposit with the least holding period.
HOW DO YOU BUILD AN EMERGENCY FUND?
Pay yourself first: The easiest way to build an emergency fund is to pay yourself first. If you are employed, which I believe most of us are, set aside a portion of your salary every time you receive it. Depending on your expenses, the least amount advisable is 20% but of course, the higher the better.
One of the most useful personal finance equation is: INCOME - SAVINGS = EXPENSES. That is, set aside a portion of your salary as savings before you can spend the rest. Why? It is because savings is the most important expense as it buys your own future.
Budget. Learn to budget your money. Prioritize your expenses more on the needs and not on the wants. There are a lot of ways on how to squeeze your money into savings to build up your emergency fund.
HOW MUCH SHOULD YOU SAVE FOR AN EMERGENCY FUND?
The amount you need to save for an emergency fund depends on your situation. If you are the sole breadwinner of your family, it is advisable that you need to save at least 6 months to 1 year worth of living expenses. Compute you average monthly living expenses and you need to save 6 months up to 1 year worth of that. This is also enough just in case you get laid off in your job.
However, if you don’t have a lot of dependents or if you have other sources of income to support you, you might want to consider up to 3 months worth of your monthly living expenses.
Just remember if you were able to save for your emergency fund already, invest your extra cash in other types of investments where it can provide more interests for your money. Here are some of the options on where to invest your extra cash.
LOL @ the photo! It's the best way to illustrate how emergency funds should work. But of course, you shouldn't settle for just saving your loose change for the rainy days. The bigger your goal amount is and the sooner you reach that, the better. It's your personal insurance policy, minus the agents.
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