The Importance of Emergency Funds

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!!! 🙂

One of the use of an Emergency Fund

This will serve as a prelude on my future post regarding Emergency Fund.  I just can’t help but to immediately share my experience of how important having an emergency fund really is.

We normally leave the house to go to work around 7AM and we would normally use the car. But to my surprise, the car just wouldn’t start. Twice, I tried to start the engine but to no avail. My initial reaction is to pop the hood and checked the battery terminals if it is loose. I disconnected the terminals and put it back in. Tried to crank the engine and it still won’t start. The first thing I thought is, the battery is done. However, I didn’t experience a hard starting the last couple of days. The only thing I remember is that it had a little jerk when I started it the day before.

Left with no choice, I told my wife to just call tricycle so she can go out of the subdivision. For me, I called on the Motolite hotline and requested for an immediate battery delivery. This time I ordered the Motolite Gold. The previous one was an Enduro.

Fortunately, I had an available cash which really came in handy in situations like this. This is the result of the discipline that I’ve developed through the years when it comes to money management (more of that in future posts :)). I was thinking of using my credit card but there were time that I’m already afraid of using it due to several incidences of double charging, which is sometimes one of the problems of using credit cards, even if I am going to pay it online afterwards.

Fast forward. The Motolite personnel arrived as scheduled. Tested the old battery and it really needs to be replaced.  Installed the new one an I was able to start the car.  After several testing, I paid the guy and gave him an additional tip for a good service. The good thing about this is I paid in cash without feeling hard about the whole thing.  Even if the battery cost around P5500.00.  That is because I have available funds intended for things like car maintenance.

With this experience, I really would want to encourage everyone to create an emergency fund regardless how much one is earning. It doesn’t matter how much we earn. It on how much we save that matters.