22.FebWhy you need an emergency fund
What is an emergency fund?
It’s basically a collection of money that you can access whenever there’s an emergency. And only an emergency. Emergencies may include the following: the sudden loss of a job, unforseen medical bills, a natural calamity, sudden home or vehicle repairs, etc.
Upgrading your cellphone is not an emergency. Neither is buying new clothes - unless your house happened to burn down and all your clothes went down with it.
In the past, I’ve used my emergency fund for medical bills, both for myself or relatives. However, because I was hospitalized last year (for amoebiasis), and had other unexpected medical expenses (I don’t even want to talk about those) my emergency fund suffered a big dent. I need to build it up again.
Where should you put the emergency fund?
Not under your mattress, that’s for sure. Here are some options:
- Savings account with ATM access. Because emergencies seldom happen during banking hours. In terms of accessibility, this is a good choice. However, this may be difficult for those who spend money impulsively. Having your emergency fund accessible might tempt you into using it for unnecessary purchases, and before you know it, it’s almost completely depleted.
- Savings account with only passbook access. Since passbook withdrawals are a bigger hassle, some people prefer this so they won’t be tempted to use the funds. Part of my emergency fund is in this kind of account.
- Time deposit. These tend to have better interest rates than savings account. The downside is that if you don’t have access to it until the maturity date - unless you want to give back part of the interest you earned to the bank. Most of my emergency funds are here.
- Investments. This may include money market funds, mutual funds, and other investments. The return of these investments tend to be high, but you need to educate yourself a lot to get your investments right. Since most of these investments aren’t insured by the PDIC or BSP, if you invest in the wrong areas you might not get all of your principal investment back. This is only good for people with high-risk tolerance and who already have at least 3 months worth of living expenses stashed away (anything above the 3 months you can invest in without feeling unsafe). Personally, I’m still trying to educate myself with investing, so I haven’t taken this route yet.
Also, keep in mind that a credit card is NOT an emergency fund. Using a credit card to pay for huge emergency expenses might cost more in the long run because of the interest and extra fees you need to pay.
There may be other ideas that I haven’t mentioned above. The point is that you should know your risk tolerance and temptation to spend when deciding where to put your emergency fund.
How much should be in the emergency fund?
That all depends on your feeling of financial security and what your monthly living expenses are.
If you work in a high-demand field and you know that it’s almost impossible for you to be unemployed for too long (because of experience, skills, or connections) or you have multiple income streams, then perhaps 3 months worth of living expenses should be enough.
If you’re the sole wage-earner in the household and you have many dependents, or if you have non-regular work (such as a freelance illustrator, independent filmmaker, etc.) it’s good to set aside at least 6 months to 1 year’s worth of living expenses.
How am I doing with my own emergency fund?
My personal goal is to save at least 1 year’s worth of living expenses. This is because I have many dependents and still have to pay for my school expenses. I’m 1/3 through that goal.
My main problem was the medical expenses I spent last year - they really ate away my emergency fund. I still feel safe with the amount left, but I’d feel better and I can take more financial risks (such as investments, riskier business decisions, etc.) if I know that I have a year’s worth of living expenses stashed away.
Do you have an emergency fund? Where do you keep it? How many months of living expenses do you keep stashed away?
This entry was posted on Friday, February 22nd, 2008 at 5:01 am and is filed under Emergency funds, Financial Tips, Saving. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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We are currently buiding our emergency fund. I opened a high yield saving account at 5.99% pa here in Qatar. It’s e-savings so no ATM, no cheque. Withdrawal can only be done via wire transfer. No holding period and no withdrawal limit so you can withdraw anytime. I believe this is a better deal than many deposit products.
Wow, I don’t see interest rates like that for savings accounts here in Manila. Meron din naman, pero not with major chain banks and usually with withdrawal limits or with high initial deposits (from what I’ve been researching, usually over P250,000). Eventually when I bulk up my emergency fund to that kind of amount, I’d love to get those rates for savings accounts or TDs. But for now, I can’t
Medyo malaki din ang initial deposit if converted to peso. Pero for OFWs here, tamang-tama kasi instead of sending the dollars in the Phils, ipunin na lang sa e-savings. Meron din mga deposit product ang banks dito to jumpstart savings.
Rural banks are a good way of earning money…they give as much as 7 to 16% pa on time deposits. Of course, make sure you know what the risks are..but generally, money below 200k PhP should be safe cause it will be insured with the PDIC
It’ll really be hard trying to convince Pinoys to have an emergency fund when there’s always something tempting enough for them to buy, be it a new cellphone or an upgrade on their car or whatnot. Plus Pinoys will always rely on their network of friends and family (”uuy pautang”) in times of dire need so they won’t see the point of breaking their backs to save for an emergency fund. But nice try Celine
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This is such a nice post!And very helpful too!
I’m also trying to “build up” my emergency fund and I wrote a mini guide here
I’m still mulling over the “right ” bank account to hold it in. Like you said, it should be easily accessible but not to tempting and if possible with high interest rates. Have yet to see one here in PH.
Thanks! Especially for sharing your own guide.
Almost forgot Celine, I took the liberty of linking your FP site to my blog (without first asking your permission, yaiks!). It’s one very good and practical site I don’t want to miss reading your post since day one I stumbled on it!
I hope you won’t mind.
Thanks really.
I don’t mind, in fact, thanks for including me in your list of links.
Since you shared your emergency fund guide, I’ve been browsing your blog, and you have a lot of solid personal finance advice to offer, so I’ll link to you as well - if that’s okay
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