Okay, ready?
I am no financial adviser nor am I saying that I'm doing so well with my finances. I'm just your regular, info-hungry 20-something mom.
I'm also just your regular working gal who finds it so tempting to spend all of her income on shopping. It's a monthly struggle really!
But that's just the thing. Many of us don't really need the credibility of finance gurus. Most of the time, we just need someone who's on the same ground as us., someone who experiences the same "temptations." I'm as average as one can get, so you can be sure that what I am saying is not only relatable but also practicable!
I admit that out of all the non-negotiables in my budget (check this post for more about non-negotiables), I find it the hardest to allot money for the emergency fund. It just looks so pointless because I don't know what I'm saving up for or why I need to do it.
But I also have to admit that during times of emergency, I praise God for his imparted wisdom and for convicting me that, yes, an emergency fund is necessary.
I already wrote a post detailing the reasons why one should have an emergency fund, so let's go straight ahead to the practical tips and how-to's. Here are some of the commonly asked questions about emergency funds and my attempt to answer them.
1. How much should I save?
Financial gurus say the ideal amount to save up would be the worth of 3-6 months of expenses.
This doesn't really refer to your salary. Instead, it refers to your expenses. For example, if one earns P30,000 but only needs to spend P18,000, I think it's practical to use that as a starting amount. After all, one function of the fund is to finance one's expenses in case he loses his source of income. In this case, it is ideal to save up P18,000 x 3 up to P18,000 x 6.
Frankly, I think it's impossible to "over-save" since you're bound to use it for something important anyway. Because of this, Job and I plan to always keep building our funds. No harm in doing it in my opinion.
2. How do I know how much my expenses are?
If you're planning to build an emergency fund (which you should), I suggest you begin tracking your expenses first. Only through tracking your expenses will you see how you spend your money and how much your "necessary expenses" are.
For us, these include bills, mortgage, food and groceries, yaya's salary, and the like. In the case of an emergency i.e. the loss of a source of income, I don't think I need to include gym membership fees in my expenses.
3. Where should I keep the money?
Since its purpose is to be used for an emergency, it needs to be kept where it can be easily withdrawn. You know the nature of an emergency; it's hard to foresee.
Because of this, it is best to keep your emergency fund in a bank account with an ATM card. This way, if the emergency happens at night, you can easily withdraw the money.
As with all kinds of things, though, it is wiser to not put all of your eggs in one basket. In my case, some of my money was in an ATM account, some in a checking account, and the rest in my local but stable co-op. Don't worry; they contain just a little amount of money each hehe.
4. Can I invest my emergency fund?
No! At least, not yet. Aside from the fact that investments are not that easy to withdraw (hello, emergency), they are not consistent, which can harm you.
For example, we know that investing in stocks is nice because money steadily increases but we're talking about long-term. Even in big companies, stocks still take a dip. What if you encounter an emergency during a dip and your money goes lower than expected? Ayayay.
Instead, go for boring banks and cooperatives with non-dynamic but steady rates. After all, you don't need to earn using your emergency fund anyway.
(Financial advisers suggest that we start investing only after our emergency funds are enough - 3 to 6 months worth of expenses.)
5. What is considered an emergency?
For me, basically, an emergency is a threatening situation. It's something unpleasant that you're not prepared for, something you don't want to happen. Examples are medical emergencies, company layoffs, business problems - it's pretty much common sense.
With this in mind, here are the things that do not constitute an emergency:
- a new gadget is not an emergency
- your favorite store on sale is not an emergency
- Christmas, birthdays, and special occasions are not emergencies
- entertaining visiting relatives is not an emergency
I mentioned last week that I bought a laptop using my emergency fund. It's honestly an emergency because I couldn't work if I didn't buy one. Also, I didn't want to buy one in the first place, so I didn't have a choice.
Again it's common sense. Need vs. Want.
6. My target amount for my emergency fund is pretty big. How can I start?
I find that calculating how much I need to save intimidates me, but at the same time, it encourages me. For some people, though, it can be pretty disheartening so please discern your own tendencies and do what you're comfortable doing.
Now if you're like me who gets not intimidated but excited with big numbers, don't feel the need to come up with such a huge amount at once. It's not only impractical but also improbable.
What I do is set a monthly budget field for the emergency fund and put a regular amount in it. 5% or 10% of the salary is enough as long as it's regular.
It's just a small sum, but adding it regularly to my funds makes it grow slowly and steadily. And you know who won the race right?
Photo: http://www.trendsandreturns.com
Eventually, you'll reach your target amount. Then you can do more things like investing. Yay!
7. Can I use my credit card as my emergency fund?
Absolutely not! Just imagine the soaring interest. Aside from that, it plainly defeats the purpose of the emergency fund, which is to reduce stress and promote financial independence.
Remember, the credit card is only a tool of transaction, not a savior.
8. Can I use my emergency fund to lend money to another person?
I would really prefer not to but I think there are times when it would be necessary. However, I have three caveats:
a. First, the person must be family or a very very close friend.
b. Second, he or she must have the means to pay me (what if I had an emergency?).
c. It must be an absolute emergency (see Question #5).
These are just guidelines. At the end of the day, it's up to you to discern. If you are still building your fund, you need to guard it more tightly just like what I'm doing. But if you have already saved enough and even more than the buffer amount, by all means, be generous with your blessings.
Whew! Was this long or was this long? Sorry, I tend to get carried away when the subject is personal finance. If you made it this far, then thank you! I hope I was able to address your questions and satisfy you with my answers. If you have more questions, don't hesitate to ask me by commenting or by sending me an email.
Have a great weekend!
Photo: http://www.momwithaprep.com
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