I recently posted one of the use of having an emergency fund. This post will somehow dig deeper why we really need to stash away a portion of our income to build up our emergency fund.
First of all; what is an Emergency Fund? It is an account used to set aside funds to be used specifically on things which are not a usual part of our regular expenses. The purpose of this account is also to serve as a safety net in the event of personal financial crisis. The ideal emergency fund must be equivalent to three to six months of our monthly expenses.
Building up an emergency fund is also another way to prevent us from incurring loans or debts with high interest. It must be placed in an account which should be easily accessible, such as an ATM savings account.
From my previous post, I mentioned something about the prosperity formula. From our income, we must first subtract a portion which is to be used for savings.
Income – Savings = Expenses
Ideally, it is recommended that we set aside 20% for our savings. 30% or 40%, much better. It depends on how much we can afford to save. That 20% can be subdivided into savings, investments and emergency fund. It doesn’t really matter how much we earn, its on how much we can keep. The discipline of saving something for the rainy season must be already ingrained in our minds. The sooner we start, the better. Let’s not wait for tomorrow to start with this habit. We must not procrastinate.
If the emergency fund was used, we need to ensure that we replenish it the soonest possible time. This is a continuous cycle. We must do this not because it is a responsibility. We must do this because this is a habit. A habit is something that we love to do repeatedly.
Happy Saving!!! 🙂