One of the first things you should do when starting with a savings program is to build an emergency fund. An emergency fund is money you can use when an unexpected financial crisis happens. Some examples of events that can lead to a financial crisis are: loss of job, emergency home repairs, major accidents, prolonged sickness and sudden death of a family member. Your emergency fund will support your needs while you are adjusting to or fixing your situation and help you avoid getting into serious debt.

Although the events mentioned, except for job loss, can be covered by an insurance plan, the emergency fund is still useful to cover expenses that need to be paid immediately because it takes some time and paper work to process insurance claims. Besides, there are many more emergencies that could not possibly be covered by an insurance plan. For example, unexpected trips to visit a dying parent or emergency car repairs.

Ideally, you should have an emergency fund equivalent to 3 to 6 times your monthly income; this should be sufficient to cover most unexpected expenses. So if you’re earning P15,000 monthly, your emergency fund should be between P45,000 to P90,000.

The emergency fund is a big amount of money so you better be smart about where to keep it. Your home is the last place to park your money because if you’re the typical Pinoy, you will easily get tempted to use it for something other than an emergency; for instance, for “beer and pulutan” during a Manny Pacquiao bout or for an elegant jewelry set peddled by your kumare.

However, it is a good idea to keep at home a small portion (about ½ month’s income) of your emergency fund to cover extremely urgent expenses like rushing a family member to the hospital late at night or emergency home or car repairs on weekends when banks are closed or ATM machines are down.

The rest of your emergency fund should be placed in an interest-bearing account so that it will continue to grow, even a little, while it’s not being used. Make sure that you choose an account where you can easily withdraw the money. A savings account with an ATM card is a good option. But if you find the interest rate too low, split your fund and put some in a time-deposit account.

The emergency fund should not be used for anything else other than financial emergencies. That means you should not use it for paying your loans or credit card dues or buying that nice pair of shoes during a “midnight sale.” If you get tempted to use your emergency fund for something else and a crisis suddenly strikes, you will end up grasping at straws and you will likely borrow “expensive” money. (Cash advances from credit cards and “release agad” loans come with a price in the form of high interest rates and charges.) And what if there’s nobody who can lend you some money? The situation can get worse like a family member needlessly dying because you can’t afford proper emergency treatment.

Soon after you’ve used up a portion of your emergency fund, build it up back to its original level as quickly as possible. Again, this is to help you survive a financial crisis without getting into debt and prevent an already bad situation from getting worse. Remember, emergencies can happen any time and can occur one after another within a short period. As a smart saver you should be prepared at all times!

Last update: February 18, 2008
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