“In times of life crisis, whether wild fires or smoldering stress, the first thing I do is go back to basics...”---Edward Albert
Universally
accepted concepts of monetary stability and financial freedom encapsulate the basic theme on how to build a solid emergency fund. As defined by Investopedia, Emergency
Fund is “an account that is
used to set aside funds to be used in an emergency, such as the loss of a job,
an illness or a major expense”. For Filipinos, the term
emergency fund is used interchangeably with the term “ipon” or savings.
It is a common theme not only in teleserye but as well as in conversations
along the streets how someone’s life was cut short because the hospital did not
accept the extremely ill and dying patient due to lack of money. While some of
these are fabricated for the drama, more likely than not there are cases which
speak volume on the reality of having no emergency fund.
The Need
Today, financial planners advocate
the need to build an emergency fund to meet unforeseen cash outlays. As the
words imply, emergency fund basically is used to meet unbudgeted expenses for
emergencies such as, but not limited to, hospitalization, medicines, sudden
lay-off or termination from job, or a discontinued source of the primary source
of living. Ideally, emergency fund accounts for three to six months’ worth of
living allowance or salary.
Aside from meeting expenses on
hand, emergency funds are also established to reduce, if not eliminate the need
to borrow money when the crisis hits the family. Imagine, using a credit card
to pay medical expenses amount to Php200,000 at 3.5% monthly interest. In one
year, you will have to pay roughly Php284,000 (exclusive of other charges and
fees) in order to extinguish the debt.
Building an Emergency Fund
Set a Target. It is important to know how much the fund would worth in
order to set the monthly save up and to determine how long it will take for you
to establish the fund. Most savers multiply their monthly salary with 6 [months]
say Php20,000 times 6; that’s Php120,000 emergency fund goal. Target also
includes a definite timeline and your monthly savings. Example, you want to
build the fund in two years that would mean Php120,000 spread over 24 months is
Php5,000 per month.
Set Aside. If monthly save up plan is too cumbersome and seems
unrealistic, you can start gradually by setting aside comfortable amount that
would not drastically change your lifestyle. You can start at Php500, Php1,000
and eventually increase it with time.
Discipline. While it is a huge milestone to start saving, Filipinos
tend to be less consistent in keeping up with the attitude. As part of our
culture, we are known for “ningas kugon” attitude which is good at the start
but eventually fail to continue what we started. Break the bad habit and learn
discipline. Like a loyal lover, stick to your financial plan and reach that
goal no matter what.
When Discipline Falter. Like building an emergency fund, keeping one’s
discipline is also a challenge. If you cannot trust your consistency (as of
today), You can resort to ‘forced saving’.
Open a save-up account or auto-debit arrangement which automatically
transfers a portion or a specified amount of your payroll account (or nominated
account) to the save-up account. Contact your local bank for this feature and
grow your fund without even deliberately noticing it (BPI offers a save-up
account with free insurance, you can check that out).
Keep it Away and Safe. Emergency fund is intended for life crisis which comes
with financial implication. It should not be touched just because the latest
iPhone is already available on the market or summer vacation with friends is
too tempting to skip. Deposit it on an account not readily available for
impulsive buying but accessible enough when the emergency strikes. ATM account
is not advisable if you lack discipline but if you get one make sure you keep
it at home.
One Last Thing
If you can spend as much as Php200-Php500 for
a Starbucks visit or Php1,500-Php2,000 for every night out, party, trip to the
salon, luxury meal and even more than Php20,000 for the latest gadgets, then
there’s no excuse why you can’t build or afford to buy yourself a more secured
and stable future.
Setting aside comfortable amounts
on a regular basis will accumulate into a great sum in the future and might
just save your life or the lives of your loved ones. Though the process may be uncomfortable at the
start, it is nothing compare to the pain of regret when you badly need the emergency
fund but did not have one. In the words of Jim Robin, “We must all suffer one of two things: the pain of discipline or the
pain of regret or disappointment.” Your
call!
In Case of Financial Emergency, BREAK GLASS!
Reviewed by Brewing A Better You
on
Saturday, April 18, 2015
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