At the onslaught of something unexpected, who do you turn to? Your parents, your best friend, your relatives or your emergency fund? The majority of us will choose any of the first three. Here are the ways to start and build your own emergency fund.
The rule of thumb
Financial experts say that an emergency fund should be enough to cover up to 6 months of expenses for a single person with fixed monthly income. It will take more months for a married man or woman; let's say, 6 to 12 months of coverage. So, calculate your monthly expenses first. If you are spending $1,000 per month, for example, your emergency fund should be $6,000. This amount is enough to cover for all the months' expenses so that you won't have to borrow money from other people.
1) Save at least 5% of your income
Start with saving 5% of your bi-weekly salary (or $100 per salary if you prefer). Just make sure that the amount is reasonable for you and won't jeopardize the necessities. However, this doesn't necessarily mean that you have to stop building your emergency fund once you reached the $6,000 threshold based on the example above. Building the fund is an ongoing process. After all, the situations are called 'unexpected' for a reason. 2) Open a separate account
Put the emergency fund in the bank. Choose a bank that is accessible anytime, anywhere, so you have something to reach out to if, in case, the financial emergency strikes during nighttime. Consider the ADA (automatic deposit arrangement) of the banks wherein you simply need to link another account to the primary account. Just let the fund sit there and don't touch it unless there is grave reason to do so.
If you are tempted to withdraw any amount from the fund, ask yourself first – is this an emergency or not? If not, better stay away from the fund.
If you are tempted to withdraw any amount from the fund, ask yourself first – is this an emergency or not? If not, better stay away from the fund.
3) Channel extra money to the fund
A friend came to you to pay the $100 he borrowed from you from way back when. Put it in your emergency fund. Your team closed a deal and received an incentive from it. Put your share on the fund. One of your time deposits matures. Put the interest on your emergency fund account. Do you have a jar of coins that sits comfortably in the corner of your room? Take it to the bank.
It is really challenging to build up the fund because of various factors at play such as your current salary, your liabilities and your obligations (also called debts). That's why you need to seize every opportunity to build the fund.
It is really challenging to build up the fund because of various factors at play such as your current salary, your liabilities and your obligations (also called debts). That's why you need to seize every opportunity to build the fund.
Having an emergency fund is no longer a question of when and why; instead, you should be asking how you can start and build your emergency fund. The steps are easy; the challenge lies in your commitment to building up your emergency fund over time. That takes discipline. You can put it this way, if you don't have an emergency fund, and something happened to you or one of your loved ones, you'd end up financially miserable. You don't want that to happen, right?
Author: Raphael Zamora is a blogger and a freelance writer that blogs for Paramount Direct, one of the best insurance company in the Philippines. He mostly writes about life and accident insurance on his blog.
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