Is Your Wallet Ready for an Emergency?

PREPARATION IS STILL KEY

They say that the most effective way to fend off emergencies is PREPARATION.

Emergencies can range from acquiring some bruises during a bike ride, to being unable to work for the entire month due to sickness, or to a sudden death of the family’s breadwinner. Their extent and gravity are so varying that predictability is practically impossible.  Fortunately, there are ways to prepare us and our loved ones against the negative effects of these untoward incidents.

EMERGENCY FUND

One of the most valuable ways is to prepare ourselves financially. Experts call this as the setting up of an EMERGENCY FUND.  This fund is where you draw financial resources during emergencies or any unexpected, necessary expenses.  It constitutes the most fundamental aspect of money management. In fact, this should be the very FIRST thing everyone must saving for, NO EXCEPTIONS.

HOW TO SETUP AN EMERGENCY FUND

The first and most crucial step to setup an emergency fund is to determine MONTHLY EXPENSES. Here, the calculated monthly expenses should be representative or at least reflective of your actual. It is suggested that you take a number of samples, say 3 months and take the average. To give you a jump start, I have included the following guide list for most types of regular expenses:

expense_guide_list

This is, of course, not exhaustive and feel free to add accordingly or filter only the ones applicable to you.

Once you have a monthly total, multiply that value by a certain FACTOR to determine the TOTAL EMERGENCY FUND you need to put up. The factor varies across different financial advisers. Suze Orman, a renowned financial guru, for one, recommends a factor of 8, corresponding to 8 months. Francisco Colayco, a Filipino financial expert, on the other hand, suggests the factor 6 (months).  The rationale for this factor is to give some lee way and margin of safety such that ‘normal’ life could continue after an emergency. This also gives ample time for proper reactions and adjustments to problematic incidents (e.g. A person laid off would be given 6-8 months to find a new job).

Let’s say we followed Suze and employed the factor 8. For example, your computed total monthly expense is Php40,000 ($1,000).  Simple multiplication tells us that an amount of Php40,000 x 8 = Php320,000 ($8,000) should be put aside for your emergency fund. This means that your saving efforts must be primarily focused into building and maintaining this fund. Otherwise, you could be in deep trouble when an emergency strikes.

Given the unpredictable nature of emergencies, liquidity (availability) of emergency funds should be well-preserved. As such, these funds are normally stored in normal bank deposit accounts with no or little withdrawal constraints.

WHAT’S NEXT?

After you established the recommended emergency fund amount, that’s the only time you can venture into the different vehicles of INVESTING. Some of which include Term Deposits, Government Bonds, Mutual Funds, and the Stock Market. Putting up a business could also be in order for some. The point to remember is to keep the value of your money growing with the goal of earning passive income to possibly sustain you and others in the future.

I hope these information prove to be urgent and helpful at the same time. Happy saving and investing. 🙂

>> God is good all the time. 🙂

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