Emergency Fund

No one wants a bad day.  But, things can get worse if we are not prepared for it.  Hence, there must be enough reserves during rainy days.

How large one’s reservoir should be?   Majority of the financial experts opine that it should be about three to six times (3x-6x) of an individual’s or a household’s monthly expenses.  

Hence, an emergency fund depends upon one’s living standard or lifestyle.  Those which spend lavishly should have bigger tanks; otherwise, face the risk of losing a social stature when the economy goes sour or opportunity becomes evasive.  Failure to remember that life as a roller coaster has a downhill ride is one of the reasons why some famous actors become tramps later.

Given the present set-up of the economy, there is no more job security.  Even if business is going well, government’s rash pronouncements or ill-advised policies in the future may cripple the economy and cause unemployment.   The unprecedented pace of technological development may also drive a presently booming firm into obsolescence.  Even government institutions may shut down and be liquidated or be privatized. 

One may also be thinking of voluntarily giving up his/her job to explore other careers or set up a business.  Having an emergency fund will give a person that confidence to break away from the shackles of inhibition and fear.  People do not quit a strenuous post or even file for a leave from work because they are living from pay check to pay check. 

Given its importance, how does one raise an emergency fund?  

First, determine the goal. Calculate one’s total expenses per month and multiply it by three or by six. Make sure that all expenditures are accounted for, including maintenance repair of vehicles, insurance expenses and even those spend for vanity items. For a more comprehensive list, check out expense items in my previous post (Household Budget Calculator).               

Second, meet the goal. There are a number of ways to raise an emergency fund:

• Saving.  Tighten one’s belt, make a room for some extra cash and set them aside in a separate bank account.  The Kuripot Challenge may be a helpful technique in this area.  Or, one may opt to achieve the target slowly but surely by saving a fixed amount per month.  For those who prefer saving in a monthly basis, it may be effective to divide the target amount by the number of months over which you want to accumulate your emergency fund (e.g. P60,000 total emergency fund ÷ 12 months = P 5,000 per month).

• Subscribe to a Monthly Investment.  It may be more efficient to build up your emergency fund by subscribing to a unit investment trust fund or an easy investment program being offered by reputable banks or stock brokerage companies.  These institutions offer auto debit facilities which automatically deduct from one’s bank deposit the necessary monthly contribution, making the process of investing less rigorous and hassle free.  Do not worry about flexibility and affordability as the schedule and the amount of contribution are based on the client’s choices, as expressed during the application process or, if there will be a change of mind later, per modification made via said firms’ representatives or online systems.  As low as P1,000 per month, one can already start growing his portfolio side by side with developing his emergency fund.  Further, these types of assets are liquid enough, but turning them into cash requires certain procedures that may act as a kind of deterrence, unless the person is really in a pitch and is in dire need to do so.

• Set Aside a Windfall.  For those who find it hard to keep away from spending and leaving some balance at the end of the month, there is still hope --- the 13^th month pay, a fringe benefit or other similar bonuses.  Once you receive such windfall, do not ever touch it.  Put it in a one-time pay investment offered by established financial corporations, or deposit it in a separate bank account.

Third, hold on to the goal. Discipline in keeping an emergency fund is indispensable.  Its liquidity is indeed important because it is meant to finance an urgent need. Responsiveness is essential.  However, even if it can easily be tapped upon, do not consider an emergency fund as a spare or a buffer stock in case of a deficit.  It should only be used for paying for a serious, unforeseeable and immediate need.