We’ve probably all heard about the importance of setting up an emergency fund at one time or another. But from that time and now, have you already started one?
It should be quite self-explanatory why we need one, right? It’s a fund for emergencies. A financial cushion; a fallback in times of crisis. Even if we know why we need one, it can still be a bit hard to actually go and make one.
So, let’s break down the emergency fund by its definition, revisit old methods for building emergency savings, and consider the new and improved ways we can set up a more solid emergency fund. You know, the kind that truly lives up to its name.
What is an emergency fund?
Investopedia, the modern encyclopedia for all things finance, defines Emergency Fund as “an account for funds set aside in case of the event of a personal financial dilemma.” It adds the following examples for “emergencies”: loss of a job, a debilitating illness, or a major repair to your home.
Now that the definition of an emergency fund is clear, let’s highlight the point even more by looking at what Dave Ramsey, dubbed as “America’s trusted voice on money,” has to say about it.
Ramsey is known for giving out effective savings programs and advice, and he summed it up with this: “Your emergency fund is for, say it with me, emergencies only!”
From here on out, let this be your guide to truly building a solid and foolproof emergency fund. Setting up proper untouchable funds can turn your life around, and in extreme cases, even save your own life and those of your loved ones.
Emergency Fund starter kit
The most popular safety net advice is to set up three to six (3-6) months’ worth of income. This, however, can sound very limiting. Because honestly, it doesn’t have to involve just a bank account.
Here are new and effective ways you can start a solid emergency fund:
1. Think about how much you want to save up in a bank account
Be realistic. How often do you want to deposit and for how much each time? Allocate funds so it doesn’t get in the way of all your other expenses.
2. Open a time deposit account
You want something that can set the savings momentum for you. This includes the discipline of not withdrawing the money. So, one of the most effective ways for beginners seeking to build an emergency fund is to open a time deposit account. Find one with lower minimum deposit amount and set aside some emergency money as often as you can, until you’ve reached your goal amount.
3. Invest in Life Insurance
Personal Finance guru and Ready to be Rich founder Fitz Villafuerte wrote this about Life Insurance: “[It] is important because it provides financial protection in case of your death or disability, but it’s useless for most financial emergencies.”
“Your emergency fund is there for you, when an urgent and important expense [happens]. Your life insurance is there for your family, if death or disability happens to you,” Villafuerte wrote.
Find the best life insurance investment that suits your needs. Life insurance is your cushion for disability or death. This extends to your loved ones, too. Sure, there are some life insurance packages that let you withdraw some of your funds after a few years, but you still shouldn’t rely on it solely as an emergency fund. Instead, invest in life insurance to build a reliable emergency net for you and your family.
4. Get health insurance
Aside from the mandatory PhilHealth, if you still don’t have one, get yourself and loved ones an HMO or health insurance. HMO stands for Health Maintenance Organization.
Depending on the coverage you choose, it covers consultations and hospitalizations at a certain budget per illness, each year. The most popular HMOs in the Philippines are Medicard, Maxicare, and Fortune Care. By getting this, it already eliminates your need to spend your saved-up cushion if ever you or one of your family members get sick.
5. Grow your income
Needless to say, all these would not be as effective if you aren’t working to grow more money for yourself. There are lots of ways you can expand opportunities for yourself and earn more income, whether online or through side jobs you’re skilled in. Now that you’ve set better financial goals for yourself, the drive to earn more money will just come with it.
Other sources: Doughroller