Aside from your savings account, there’s also another important investment you should be starting right now—your emergency fund.
The emergency fund is used in the event of a crisis e.g. a loss of job, an illness, major house/car repairs, extended care for elderly loved ones, or a financial dilemma. This account serves as your safety net. Having an emergency fund prevents you from using your savings and stops you from the temptation of relying on high-interest debt options such as credit cards, bank loans, or the so-called 5-6.
“Having an extra source of funds, such as the emergency fund, gives you a peace of mind during stressful times," says Bryan Jay Maningas. financial educator and founder of trending Facebook page Save and Invest Correctly. It’s better to be safe—and ready—than sorry,”
If you’re planning to start one, here are some tips from Maningas to help you out.
Step 1: Start by saving P1,000 a month
“A basic rule of thumb for determining how much you should set as your emergency fund is this: it should be 3 to 6 months of your total monthly expenses,” Maningas says.
The amount, he adds, may vary depending on your living situation, number of children, job stability, etc. But growing an emergency fund that's equivalent to your total expenses for 3 to 6 months is ideal.
And to start that, you have to save at least P1,000 a month.
“P1,000 a month may be a hefty amount, but if you can, you should start with this,” Maningas advises. “Just imagine how expensive an emergency would cost when compared to this number.”
Here’s an ideal budget breakdown:
If you’re a working single guy…
Assuming, your take-home pay every month is: P20,000
Ideally, 30 percent of it should go to your monthly savings= P6,000
Let's say, your monthly expenses (bills, food, fare,) are around: P9,000
Plus, other expenses (date budget, hobby budget, grooming, travel etc): P4,000
The remaining P1,000 should be set aside for your emergency fund.
(If you feel this is not feasible, you can still save for your emergency fund by allocating a lower amount.)
Keep on saving P1,000 until you reach three months' worth of your monthly expenses. For this example, the goal is to reach P27,000 (P9,000 x 3). You can do this for at least two years. You can fast-track this by putting your extra money (13th month pay, Christmas bonus, incentives, etc.) into your emergency fund (Check out this link for other savings tips).
Step 2: Set aside until you have three months’ worth of your monthly expenses
When you've saved P27,000, your next goal is to increase the emergency fund until you reach your next target, which is six months’ worth of your monthly expenses, or P54,000.
Again, if you want to reach your goal faster, you have to put the extra money on your emergency fund, or increase the P1,000 emergency fund budget (assuming you have raket or a higher take-home pay by this time).
Step 3: Set money aside until you have six months’ worth of your monthly expenses
Reaching the final goal, which is six months’ worth of your monthly expenses, may be challenging. Again, you can do the tips mentioned in Step 2, or you can save smaller amounts regularly i.e. weekly or bi-weekly. Keep at it until you eventually meet your goal.
Where should you keep your emergency fund?
Of course, it's unwise to just stash P54,000 in your bedroom drawer, especially if you're resistance to temptation is weak. According to Maningas, you can opt to invest the money in a low-risk bond o mutual funds or keep it in a separate bank account without debit card or online access. “The best choice is to invest your money in mutual funds, as it will make your hard-earned cash grow by 2 to 5 percent (depending on your chosen company) every year,” Maningas ends.