Photo by @camilo_jimenez on @Unsplash
I had a casual conversation with my friends when the topic pivoted into finance and the stock market. I chimed in that I usually put off investing when my Emergency fund is not fully funded (6 months of my monthly expenses). Shockingly, one of my friends innocently admitted that she has no clue what an Emergency Fund is.
I can't blame her. I knew about Emergency Fund when I was already 22. I was young but should have known the concept when I started working full time at 20. To add, I figured it all out myself. My parents didn't teach me about Emergency funds nor did we sit down as a family and talk about money matters in general. My mum, however, had a monthly budget and was frugal. No wonder I budget in detail and turned out to be frugal too (lol).
Anyway, if you are like my friend, say no more. Pag-usapan natin to!
What is an Emergency Fund?
This is an easily accessible cash buffer to protect your other assets when life's mishaps happen. When your car or boiler breaks, the roof is leaking, your child caught a bug requiring hospital care, or your boss did an "eeny, meeny, miny, moe" and fire you, an emergency cash reserve allows you to deal with these issues without using the money you saved for more important things like retirement or investment.
I was searching the internet about the EF concept in the Philippine setting, luckily enough, I stumbled upon a study conducted by the Central Bank of the Philippines (BSP) in 2015.
Interestingly, in relation to saving money, it documented the following:
* 4 out of 10 Filipino adults (43.2%) currently have savings, 32.3% used to save in the past but have stopped saving money, while the remaining 24.5% have never experienced saving money
* 7 out of 10 adults (68.3%) who are saving money keep their savings at home. 32.7% of adults with savings put their money in banks while others save through cooperatives
At a glance, there are so many things that are wrong here based on how Filipinos manage our money but let's focus on bullet 1.
For those that have savings (43.2%), even though BSP did not categorise where this money is being saved for (i.e. emergencies, cellphone, car, vacation, life event) making it unclear, actually, it doesn't matter. This only shows that almost 60% of Filipinos potentially has ZERO emergency fund, and for savers, is likely that the money is saved for something else. This study was conducted in 2015 so who knows behaviour may have changed for the last 5 years but I am yet to see statistics for the present.
How much cash
There are a few arguments on how much money is saved in an emergency cash reserve pot. Papa Dave Ramsey for example, preaches $1000 Emergency Fund first, pay-off debt next, then at least 3 months of monthly expenses, then 6 months. For the risk-averse, they can go as high as 12 months to at least 2 years of monthly expenses in cushion.
Quite frankly, for my personal circumstance, 1 month cash reserve is enough as I work as a nurse with one of the highest vacancy rates in England. I also rent so I don't need cash for house fixes and I don't own a car. However, as a member of the Sandwich Generation Club, based on my calculations, I need at least 6 months of emergency money just in case shit happens back home in the Philippines.
How much money to be kept in this fund is therefore case by case basis. Having a preview of what could go wrong in every facets of your life is a good start and then adjustments could be made along the way.
I opened a separate bank account sole for this. It earns the crappiest interest yield but earning interest out of this fund is not the point. Although others do hack their Emergency fund by saving it into a high yield savings account. It also makes sense to me that this fund is put on a different account so I don't mix my regular incomings and outgoings. And when it comes to shove that I need to mobilise the reserve, I would know how much exactly I used and then simply refuel it back at full. Again, in my case is 6 months of my monthly expenses, which is £7200.
I also predict that as I grow old past the wealth accumulation stage of my life, I would propel my safety margin to at least 1 year. Or on a contrary, I could press it a bit down to £6000 should I see opportunity like a dip in the market for example.
About 4 months ago, my mum got seriously ill to the extent that she could no longer work. After the initial lab tests and doctor's appointment, the clinician was unable to determine the exact cause of her deteriorating health. This was clearly an urgent matter and therefore, I mobilised my Emergency Fund so she could get specialist appointment and treatment - Ophthalmologist, Cardiologist, and ENT. She was prescribed multiple drugs and diagnostic tests after these appointments. This is exactly, how important having AND maintaining an Emergency fund is. I had access to that fund stat without me touching my investment portfolio. And then when things got better, I just replenished my emergency shield back up.
Having an emergency fund is a powerful tool to ensure that other important assets are protected when unexpected events happen to your life. It is beneficial to separate this from your main account. The amount is dependent on your personal circumstances and risk tolerance. If used, replenish as soon as possible.
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