Why you need an emergency fund in the Philippines

If there’s one thing the last decade has made very clear, it’s that nothing in life is certain. Whatever you have today can be taken away from you tomorrow, whether it’s your job, your house, your health, or your savings.

One way to be prepared for whatever life throws at you is to start an emergency fund. It is a foundation of good personal finance. But what is it and how do you save for an emergency fund?

What is an emergency fund?

An emergency fund can save your life if something bad happens. Also called a cash cushion, an emergency fund is money saved for the unexpected.

An emergency fund isn’t money you use when you want to buy a big-ticket item or travel out of town on a whim. Emergency funds must be reserved for unexpected scenarios that require you to shell out large amounts of money.

An emergency fund can help you navigate unexpected moments like losing your job or a sudden hospitalization without dipping into your life savings or selling an asset. This way, your assets remain intact, and you will not be derailed from your financial goals due to money problems.

What is the importance of an emergency fund?

Why is an emergency fund important? Here are several scenarios:

Loss of employment

Losing a job can happen to anyone for various reasons, including company restructuring or downsizing. This is especially true during times of crisis. You may not always get a notice, so it’s best to have a fallback in case you do lose your job. An emergency fund allows you to survive until you find your next employer.

Getting sick or having an accident

Nobody likes to think about getting sick or going through a major accident but there is no guarantee that this will not happen. Recovering from an illness and injury entails medical costs.

Without an emergency fund, you are forced to spend money from your savings or get into debt. The financial strain may add stress and lead to anxiety. Instead of focusing on your recovery, you’re more worried about figuring out how you can afford your medical bills or pay off your debt in the next few years.

Having a child

Starting a family is a major life milestone that comes with expenses.

If you have not previously saved up for the expenses of raising a child, he or she can eat away at your savings.

This is where an emergency fund comes in handy. Having a baby in the Philippines can cost you money. Your baby may require emergency hospitalization and other unexpected expenses. An emergency fund gives you a bit of a cushion as you go through the different milestones of raising a child.

While an emergency fund helps you weather financial challenges, it’s wise to set a boundary for when you can and should use your funds. We’ve established well enough that sudden job loss, car breakdowns, and illnesses are emergencies. But what doesn’t count as a financial emergency?

Here are examples of scenarios that don’t count as emergencies:

• Elective health care like plastic surgery or LASIK eye surgery
  
• Discounted travel vouchers
  
• An invitation to a destination wedding
  
• Home renovations for aesthetics only (changing the rugs and carpets, painting the walls a new color)
  
• Upgrading your gadgets
  

How to start an emergency fund

An emergency fund helps you through those rainy days and gives you peace of mind knowing that you can weather any storm. Here are steps to building your emergency fund:

Set a monthly savings goal

Prioritize building your emergency fund. Set a monthly savings goal. This is the monetary amount you want to work towards each month and commit to adding to your emergency fund.

Budgeting and discipline are critical in every financial situation. Apart from establishing good money habits, commit to smaller monthly savings goals. This will make saving more manageable, ensuring that starting an emergency fund doesn’t require major sacrifices.

Just keep working at it and be consistent. You’ll get there before you know it.

Establish a budget

Making a budget will help you attain your monthly savings goal. Budgets help you manage your money better and, if necessary, find areas you can cut back on.

Begin by listing down your monthly income and all of your monthly expenses, including your savings goals. Make it as detailed as possible. Then, categorize your expenses according to needs and wants. Establish how much you can spend per category and once you’ve decided on a number, lock that in.

Commit to it and see it through every month.

Open an account for your emergency fund

To make it easier to save up and manage your funds, consider opening another bank account that’s dedicated to your emergency fund. Separate your emergency fund from your life savings account and your spending account to make financial management easier.

By separating your accounts, you can easily keep track of your savings and avoid dipping into your different funds for the wrong reasons.

Plus, opening an account specifically for an emergency fund establishes your commitment, which can motivate you to continue saving.

Review your strategy

A lot can change in a few months’ time. You could land a coveted promotion, pick up freelance work, or find that you’re spending less than what you budgeted for, and many other possibilities that could alter your finances.

You need to make sure that your emergency fund corresponds to your current financial situation and needs.

Make it a point to review your budget every so often and see what is and what isn’t working for you. If there are ways for you to save up more so you can reach your emergency fund goal sooner, do it!

Should you invest your emergency fund?

This is tricky. Investing can have gains which are bigger than leaving your money in a secure savings account. But with the potential for bigger gains comes the risk of bigger losses. Remember, there is always risk involved when it comes to investing, no matter how small. Given today’s volatile stock market, investing something as important as your emergency fund isn’t recommended.

You don’t want to risk losing your lifeline and your last line of defense. You’re better off securing it in a savings account, even if it means it does not grow very much.

How much should be saved in an emergency fund?

There is no fixed amount you should have in an emergency fund. However, as a general rule, your emergency fund should cover at least three to six months’ worth of your living expenses. The emergency fund’s importance is based on its ability to cover your daily expenses for at least half a year should you be unable to work.

Ultimately, though, the amount you have saved in your emergency fund should depend on your living expenses.

Some people only factor in the bare necessities when computing their emergency fund (i.e., food and utilities) while others choose to add in a few luxuries so they can maintain their lifestyle. Adding a window for luxuries may come in handy in the future since it’s a form of overpreparation. But then again, it depends on how much you make and how much you can set aside from your paycheck.

When building your emergency fund, just keep asking yourself: Is this enough to tide me over in case anything happens to me or my family?

Where to invest my emergency fund?

Keep in mind that an emergency fund should be accessible, so you should be able to use it at a moment’s notice. Investing it in things such as Variable Unit-linked Insurances (VULs), Unit Investment Trust Funds (UITFs), and stocks is not recommended.

Good emergency fund options are high-yield savings accounts separate from your current savings account or kept physically at home in a secure place like a safe.

If you want to invest your emergency fund, possible options are a short-term time deposit and fixed-income investments. Keep in mind that although these are the most liquid types of investment, they will tie up your funds for at least six months to a year.

The ideal way to keep your emergency fund safe and accessible while still earning interest is in a bank.

Another option is to augment your emergency fund by investing in health insurance. Insurance companies provide protection in the form of a big payout to you or your family, if something bad were to happen to you. This payout covers expenses for things such as hospitalization, doctor’s fees, medications, treatments, testing, and even an allowance for loss of income.

However, unlike an emergency fund that you can use anytime you need it, insurance has certain conditions limiting its coverage, usually to medical-related incidents. You also cannot “withdraw” your money as you may from your savings account for instances like losing your job, your car breaking down, or your house needing sudden repairs, your health insurance won’t be able to provide you with any financial assistance.

Have you started building your emergency fund?

If you plan to invest in the future, it is important that you first start an emergency fund. This fund plays a crucial role in your financial status, helping prevent major losses during times of crisis.

Remember that building an emergency fund is a continuous endeavor. You need to make sure that you always have enough funds for your current needs, replenishing whenever you use your money for emergencies.

Plan for your future with the right bank account and investment opportunities from Metrobank. Contact us to get started!