Well, if we google “emergency fund”, one of the things we can see is this “An emergency fund is a stash of money set aside to cover the financial surprises life throws your way which can be stressful and costly.
An emergency fund is the money that we set aside as our financial safety net in times of future financial crisis (in other words, it is the money we prepare for rainy days). Having a safety financial net lets us avoid or at least lessen the risk of falling into debt, being dependent on credit or “utang” or just completely running out of money especially at times it is really necessary. Avoiding the risk of falling into debt is also important because usually once you start having one, it never stops and it could lead you to being dependent on it.
For instance, imagine you are have to borrow a bigger amount because of an unforeseen situation you have to deal with. Let’s just say that amount is three times higher than your current monthly income. Let’s just also say that your monthly expenses are just the same, but because you have incurred debt, you would have to include that in your monthly expenses now. If in case there would be another expenses before you had paid off the existing one, that would mean another debt and it goes on and on. Your option that time would be to find additional sources of income to pay the debts off or to just let the cycle continue.
Now, wouldn’t that be exhausting? Wouldn’t it lead us to being burn out and what not? Would we rather experience that kind of hardship when we can actually think ahead and let it be a part of our daily SAVING and SPENDING HABITS now?
EMERGENCY FUND is a crucial part of our Financial Planning because it is to guarantee that our personal finances are ready for emergencies, situations that create immediate risk to our and/or to our loved ones’ life, health, property, or environment.
WHAT ARE EMERGENCY FUNDS USED FOR?
It is used for situations not included in our monthly expenses like the following:
- Job or regular income loss
- Medical or dental emergencies
- Home repairs or appliance replacements
- Car problems and the like
- Unplanned travel expenses
- Any other expenses not included in our monthly budgeting
HOW MUCH MONEY SHOULD I HAVE IN AN EMERGENCY FUND?
Generally, it is recommended to build the EMERGENCY FUND up until it is three to six months worth of your current monthly income.
IMPORTANT NOTE: Emergency funds is for emergencies. Therefore, it should be a liquid asset that can be accessed and used easily, securely, and quickly. This is the fund advisable to be deposited in banks where you can just easily withdraw or use it whenever you need to. It can not be used nor attached into investments.