Why Everyone Needs An Emergency Fund

Everyone loves great surprises in life. A new job, a salary raise, winning a raffle draw, or just a simple gift from your loved one surely brightens up our days.

But then sometimes our breadwinner loses his/her job. Or someone gets sick and eventually the need to spend for significant medical expenses becomes inevitable. A typhoon or flood ravages your home or your car and therefore need some repairs. Or something bad just happened.

These are the times when your finances are deeply challenged.

What Is An Emergency?

The examples I mentioned above are the most common emergencies that cost us money. These can actually happen to anybody.

But an emergency may also mean CHANGE.

My mentor Dean Pax Lapid once gave me a lesson regarding change and how it affects one’s financial decisions especially on the subjects of leaving an old job or relocating a business.

According to Dean,

“As I teach – Managing Change, there are several major factors that affect a person’s life
1. death of a loved one
2. birth of a child ( both mom & dad and even grandparents get excited)
3. moving houses/relocation/leaving house
4. Losing &finding a job/business
5. change of status ( getting married, getting a divorce, retiring)

IF THERE IS CASH FLOW/MONEY MEANS in your present situation – WHY LEAVE?

Sometimes we get dissatisfied and disappointed in our present situation.  We escape from the truth without providing concrete solutions and challenge ourselves to face unplanned changes. Sometimes we create those factors. We create our own problems.

In short, we CREATE our own emergencies.

And in doing so, most of the time we are not prepared to keep us afloat when the worst comes. Thereby creating even the worst of all emergencies you could imagine.

So stop creating emergencies. Assess first and ask for discernment whether you really have to leave your present situation to face an unsure future.

What If I Insist On Facing My Own Created Change? How Much Should Be My Emergency Fund?

As other financial experts would advise, Dean Pax recommends that, “if there are other personal reasons for making that drastic decision, just make sure you have 6-12 months of household expenses ready on top of relocation costs.”

My friend Randell Tiongson, a registered financial planner, gave this advise and comment to one of his followers regarding building up an emergency fund,

“Before starting on emergency fund, it is best if you know how much you actually spend in a month. Many people I know are clueless as to how much they spend monthly.”

So before you jump off the cliff, think twice, reflect and build your emergency fund little by little. Building an emergency fund takes time and discipline. You have to do it in small amounts regularly.

Where Should We Keep Our Emergency or SWAN Fund?

Fitz Villafuerte gave an advice to our webinar attendees last week not to consider your stock market portfolio as your emergency fund wallet. Getting your money tied in stocks or mutual funds may cause you to lose money because of the market’s volatility over the short-term.

Using a credit card or getting a loan for emergency fund will also only complicate your problems when an emergency comes. But many people do it. Others even use the loaned money for investing. It is bad practice and very unwise.

Here are the best practices and places to keep our emergency or SWAN (sleep-well-at-night) funds:

1.) A savings account – Keep at least 1 to 3 months worth of your monthly household expenses here. These are for ultra-emergency situations where you can use your ATM to withdraw cash immediately. If possible, open two separate savings accounts with ATM cards from two different banks.

2) Time deposit or SDA (special deposit) accounts – Keep at least 2 to 4 months worth of your monthly household expenses here. The good thing about these deposit products is that they earn more reasonable interest than a regular savings or current account. (UPDATE: Banks have increased their minimum required deposit for SDA’s and limited the access to retail customers so I recommend that you allot your money in high-yield short-term time deposit accounts instead.)

UPDATE (05/20/2013): “The Bangko Sentral ng Pilipinas (BSP) has restricted the access to its special deposit accounts (SDAs), saying only trust accounts and unit investment trust funds (UITFs) can park and earn interest from these instruments. According to Memorandum No. M-2013-021, only trust departments and UITFs are allowed to invest in the SDAs by January 1 next year, shutting out other fiduciary businesses, including agency accounts and investment management activities.”

So better stick to high-yield time deposit products for this portion.

3) Money market placements in banks – As soon as you have established your first 6 months of your emergency fund, you can now place your money in near liquid yet higher-yielding financial instruments. But never do this first unless you have built up the first two recommendations.

But remember to always keep a few cash at home. ATM’s are sometimes not good friends during certain emergencies. OFFLINE.

For OFW’s, a separate fund for buying plane tickets and paying for visas must also be prepared separately and kept as cash on hand. We wouldn’t know what could happen in the country where you are currently working in. I call this the Emergency Airfare Fund or EAF.

Why Do We Need An Emergency Fund?

We need an emergency fund because it builds our own being and our maturity in making sound financial plans. Doing this gives us the discipline to perform our budgeting effectively.

It also marks a starting point to plan for insurance needs to minimize risks.

When you finally have more than a year worth of household expenses for emergency fund, you have more money to grow through investing. You have more money to share to others who need it most.

Despite what other people say about emergency fund-building as an equivalent to losing trust in God, everyone really needs an emergency fund. Whether you are investing, running a business, or just plainly employed.

Do you have other suggestions on building up an emergency fund? What advice would you give to people who facing new challenges brought about by their own created emergencies? Share them on the comment section below.

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Photo credit: 401(K) 2013