For those who are struggling to pay their debts, saving money for an emergency fund now might seem to be a daunting task. Aside from your debt, it can also be hard to save up for unknown future expenses if you\u2019re suffering from impulse buying or you\u2019re keeping up with the Joneses and have this fear of missing out (FOMO).<\/p>\n\n\n\n
An emergency fund is one of the most fundamental aspects of personal finance. It\u2019s entirely possible to start your emergency fund right at this moment.<\/p>\n\n\n\n
Today, I am going to cover the following things to help you build your financial cushion to get you through a rough patch:<\/p>\n\n\n\n
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- What is an emergency fund?<\/strong><\/li>\n\n\n\n
- When to use your emergency funds?<\/strong><\/li>\n\n\n\n
- The advantages of having an emergency fund<\/strong><\/li>\n\n\n\n
- How much should an emergency fund be?<\/strong><\/li>\n\n\n\n
- Best place to keep an emergency fund?<\/strong><\/li>\n\n\n\n
- How to build an emergency fund if you have debt?<\/strong><\/li>\n\n\n\n
- Effective steps to starting an emergency fund today<\/strong><\/li>\n<\/ul>\n\n\n\n
That\u2019s a pretty long list, so let\u2019s get started.<\/p>\n\n\n\n
What is an emergency fund?<\/strong><\/h2>\n\n\n\n
![\"a](\"https:\/\/i0.wp.com\/www.getfinancedlab.com\/wp-content\/uploads\/2019\/11\/Emergency-Fund.jpg?ssl=1\")
<\/figure>\n\n\n\nAn emergency fund is simply an amount of money you save or set aside for life\u2019s unexpected inconveniences. It can even cover even the worst emergencies!<\/p>\n\n\n\n
I mean real emergencies, like a trip to the E.R., a car wreck, a dental visit, or a job loss. A sale on Amazon <\/a>or Lazada<\/a> doesn\u2019t qualify as an emergency.<\/p>\n\n\n\n
Emergencies do happen! It\u2019s foolish to think that we will never undergo an emergency once or twice in our lives. And these emergencies cost a lot of money.<\/p>\n\n\n\n
Most people leave things to fate and trust that things will straighten themselves out. Filipinos are mostly guilty of having this happy-go-lucky attitude. When things go for the worst, they are at the mercy of private lenders, credit card companies, or their well-to-do relatives, which will put them in a lot of debt.<\/p>\n\n\n\n
Life will always have twists and turns. You don\u2019t really know what\u2019s going to happen, so a financial buffer is something you should be thinking of building now!<\/p>\n\n\n\n
When to use your emergency funds?<\/strong><\/h2>\n\n\n\n
![\"angry](\"https:\/\/i0.wp.com\/www.getfinancedlab.com\/wp-content\/uploads\/2019\/11\/car-problems.jpg?ssl=1\")
You won\u2019t be as mad as this when you have a safety net to fall back on to immediately have your car fixed.<\/figcaption><\/figure>\n\n\n\n As I mentioned earlier, emergency funds are strictly for emergency situations.<\/p>\n\n\n\n
But what accounts for an emergency?<\/p>\n\n\n\n
An emergency is something urgent & unexpected that requires money to do what needs to be done. This includes things like:<\/p>\n\n\n\n
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- Sudden job loss<\/li>\n\n\n\n
- Medical emergencies<\/li>\n\n\n\n
- Car problems<\/li>\n\n\n\n
- Home repairs<\/li>\n<\/ul>\n\n\n\n
What doesn\u2019t equate to an emergency?<\/p>\n\n\n\n
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- Buying new things like a TV, washing machine<\/li>\n\n\n\n
- Buying gifts<\/li>\n\n\n\n
- Vacations, Holidays<\/li>\n\n\n\n
- Eating out<\/li>\n<\/ul>\n\n\n\n
If your TV doesn\u2019t function anymore, it doesn\u2019t mean you have to replace it right there and then. Purchasing a replacement can wait and you don\u2019t have to dip your hands into your emergency funds for that kind of expense!<\/p>\n\n\n\n
You got to have a strong commitment to only use it for real emergencies.<\/p>\n\n\n\n
Advantages of having an emergency fund<\/strong><\/h2>\n\n\n\n
You can reap a lot of benefits when you\u2019ve already set up an emergency fund for yourself or for your family. Below, I\u2019ve listed the common advantages of having this type of backup:<\/p>\n\n\n\n
1. Peace of mind<\/strong> \u2013 Wouldn\u2019t it feel great to sleep soundly at night knowing that you are well prepared for whatever curveball life throws at you? Having peace of mind is priceless and will enable you to enjoy life every day to the fullest. You are free from stress or worries because your sacrifices today are contributing to your financial security in the future.<\/p>\n\n\n\n
2<\/strong>. Saves you from acquiring costly debt <\/strong>\u2013Having saved a considerable amount of money will enable you to avoid borrowing from friends or family when you need it the most. Mixing money and family can sometimes lead to hard feelings and financial trouble for the lender. Don\u2019t complicate your most treasured relationships with money issues. You don\u2019t have to pay interest either when you choose to shy away from credit card and lending companies. When you don\u2019t have debt, you are in a very good position to save more and avoid dipping into your retirement fund.<\/p>\n\n\n\n
3. Easy home loan approval <\/strong>\u2013 Forget high credit scores. You can actually get your home loan approved easily when a lender sees that your liquid assets, such as your savings are well-funded. It reassures them that you will still be able to make repayments even if they encounter a major financial setback such as a sudden job loss. It proves that you have good financial habits; thus, lowering your risk status.<\/p>\n\n\n\n
4. Earn interest \u2013 <\/strong>When you decide to keep your money in a financial institution like the bank, it will sit there all while earning valuable interest. The more you have in your account, the more interest you will earn. Choose a type of account that has reasonably high-interest rates. Look around for savings accounts that allow you to quickly access your funds but still offer a high-interest rate. Digital banks such as ING or CIMB enable you to open a savings account through their apps that earn as much as a 4% annual interest rate.<\/p>\n\n\n\n
How much should an emergency fund be?<\/strong><\/h2>\n\n\n\n
![\"\"](\"https:\/\/i0.wp.com\/www.getfinancedlab.com\/wp-content\/uploads\/2019\/11\/calculator-1024x682.jpg?resize=1024%2C682&ssl=1\")
<\/figure>\n\n\n\nWondering how much to save to build your first emergency fund?<\/p>\n\n\n\n
The ideal emergency fund amount should be 3-6 months\u2019 worth of your living expenses.<\/p>\n\n\n\n
If you are currently in debt, you can start with Dave Ramsey\u2019s Baby Step #1: Building a PHP 50,000 ($1000) mini emergency fund.<\/p>\n\n\n\n
I know, I know! That\u2019s a really big amount to save! But that is enough to help you cover a month or two\u2019s worth of rent, utility bills, and groceries. Or help you admit someone to a private hospital for emergency treatment!<\/p>\n\n\n\n
However, if you are #debtfree, and support others besides yourself, you may want to aim for a bigger amount. You can jump right into Dave\u2019s Baby Step #3: A fully-funded emergency fund (saving 3-6 months living expenses).<\/p>\n\n\n\n
If your household has a stable income, you won\u2019t likely need much.<\/p>\n\n\n\n
For example, if both husband and wife work in steady jobs for several years, then a three-month buffer should be fine. But if you\u2019re a one-income family or don\u2019t have a stable income, you need to be saving at least six months of living expenses in your emergency fund.<\/p>\n\n\n\n
Once you have the ideal six months emergency buffer, you can start investing in better-yielding instruments like an index or mutual funds, the stock market, or real estate.<\/p>\n\n\n\n
Don\u2019t get stressed out about saving 3-6 months of living expenses overnight. The amount you need to save will vary based on your situation. You can start small and you can start now! Just hitting an initial $500 savings goal will inspire you to build your next $1000 and so on. I will list down the steps on how you can effectively save up money (quickly) for your emergency fund below, so keep on reading.<\/a><\/p>\n\n\n\n
Use the free emergency fund calculator below to help you get an idea of how much should be your ideal 3 or 6 months emergency fund and for how long you will be able to save it.<\/p>\n\n\n\n
Best place to keep an emergency fund<\/strong><\/h2>\n\n\n\n
Your emergency fund should have liquidity, meaning you need to keep it in a place where you can easily and quickly access it. It doesn\u2019t have to be in cash because aside from it not gaining interest compared to depositing it in a bank, it will be at risk of being stolen.<\/p>\n\n\n\n
I advise you to open a simple savings or checking account that is tied up to a debit card. It should be separate from the account you\u2019re using to pay your bills.<\/p>\n\n\n\n
Avoid stashing it in a place that\u2019s too easy to access. If you\u2019re struggling with impulse buying, you don\u2019t want to be tempted to dip into it. You can use a different bank account for your emergency fund and hide your ATM\/ debit card somewhere you won\u2019t usually spot on a normal day.<\/p>\n\n\n\n
How to save money if you have debt?<\/strong><\/h2>\n\n\n\n
Most people who are in debt will argue that it\u2019s impossible for them to save because they have huge loans to repay first. Although eradicating debt should be a priority toward your financial freedom, don\u2019t let yourself be unprotected should an emergency happen.<\/p>\n\n\n\n
Even as you set aside funds to pay for your debt, you should still set aside any amount that would go into your savings account.<\/p>\n\n\n\n
Use Dave Ramsey\u2019s 7 Baby Steps Plan<\/a> to get your finances in order.<\/p>\n\n\n\n
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- Baby Step 1<\/strong> \u2013 PHP 50,000<\/strong> ($1,000) to start an Emergency Fund<\/strong><\/li>\n\n\n\n
- Baby Step 2<\/strong> \u2013 Pay off all debt using the Debt Snowball<\/strong><\/li>\n\n\n\n
- Baby Step 3<\/strong> \u2013 3 to 6 months of expenses in savings<\/strong><\/li>\n\n\n\n
- Baby Step 4<\/strong> \u2013 Invest 15% of household income into better-yielding financial instruments or retirement plans<\/strong><\/li>\n\n\n\n
- Baby Step 5<\/strong> \u2013 College funding for children<\/strong><\/li>\n\n\n\n
- Baby Step 6<\/strong> \u2013 Pay off home early<\/strong><\/li>\n\n\n\n
- Baby Step 7<\/strong> \u2013 Build wealth and give!<\/strong><\/li>\n<\/ul>\n\n\n\n
As I said earlier, your first main goal is to establish a mini emergency fund before smashing all of your debts. It\u2019s better to do it this way because when things hit the fan, you will not find yourself in deeper debt than where you were before.<\/p>\n\n\n\n
Effective steps to starting an emergency fund today<\/strong><\/h2>\n\n\n\n
1. Use the B-word \u2013 Budgeting!<\/strong><\/h3>\n\n\n\n
![\"\"](\"https:\/\/i0.wp.com\/www.getfinancedlab.com\/wp-content\/uploads\/2019\/11\/mockup-1-1024x684.jpg?resize=1024%2C684&ssl=1\")
<\/a><\/figure>\n\n\n\nYou will only be able to reach your goals when you create a budget. Make a budget and strictly stick to it.<\/p>\n\n\n\n
You can start by listing all your expenses for the month or for two weeks if you\u2019re paid fortnightly. You also need to list your estimated average income. Deduct all the expenses from your income and you\u2019ll be able to see how much you can save toward your emergency fund.<\/p>\n\n\n\n
When doing your budget and looking at your expenses, try to see if you can make any cuts. If you don\u2019t often watch cable TV, then cut it. You are better off moving to a less expensive streaming service like Netflix that costs only a fraction of your cable bill. If you\u2019re fine downgrading your pricey phone plan, then do it. You might be surprised to know that you\u2019ve been spending money on things you don\u2019t actually use or need.<\/p>\n\n\n\n
My budgeting method includes the use of cash envelopes. The cash envelope system is a way of budgeting your income by allocating a certain amount of cash to each category\/envelope. This forces you to only use a certain amount of money for a certain category until your next monthly income\/salary. You do the budgeting every month or fortnightly, depending on the frequency you receive your paycheck.<\/p>\n\n\n\n
You only spend what you\u2019ve put in each envelope or category. When your money is gone, it\u2019s gone!<\/p>\n\n\n\n
2. Set your savings goals<\/strong><\/h3>\n\n\n\n
- Baby Step 2<\/strong> \u2013 Pay off all debt using the Debt Snowball<\/strong><\/li>\n\n\n\n
- Baby Step 1<\/strong> \u2013 PHP 50,000<\/strong> ($1,000) to start an Emergency Fund<\/strong><\/li>\n\n\n\n
- When to use your emergency funds?<\/strong><\/li>\n\n\n\n