Money and insurance

How to Start an Emergency Fund

Life is full of uncertainties and all we can do is to be prepared for any eventuality and a good way to start is by establishing a robust financial foundation. An emergency fund stands as a crucial element in this foundation, offering a shield against unexpected challenges.

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In a recent study by TransUnion1, it was found that despite the current high-pressure economic environment, Filipinos are focusing on building financial resilience with 51% of respondents saving more into emergency funds and 34% accelerating debt repayment.

If you want to learn how to build an emergency fund, here’s the breakdown on understanding what an emergency fund is, why it is essential, how much it should be, where to invest it, and a step-by-step guide to building one.

What is an Emergency Fund?

An emergency fund is a dedicated savings pool designed to cover unforeseen and urgent expenses. It serves as a financial safety net, providing you with the means to navigate unexpected challenges without relying on credit cards or loans.  

How much should your emergency fund be?

The ideal size of an emergency fund varies based on individual circumstances. Financial experts would recommend saving from three to six months' worth of living expenses. Factors such as job stability, family size, and existing debt should influence the specific amount you aim to save.

Why do we need an emergency fund?

  1. It acts as a financial cushion

Life is rife with uncertainties, ranging from income loss, medical expenses to unexpected car or home repairs. An emergency fund acts as a cushion, ensuring you can handle these unforeseen financial burdens without derailing your long-term financial goals.

  1. It reduce stress during tough times

Having a financial safety net minimizes stress during turbulent times. It provides peace of mind, allowing you to focus on solutions rather than worrying about immediate financial concerns.

  1. It protects you from incurring debt

Relying on credit cards or loans, even if it’s from your close ones during emergencies can lead to debt accumulation. An emergency fund mitigates the need for borrowing, preserving your financial well-being in the long run.

Girl buying essentials

Step-by-step guide to building an emergency fund

  1. Evaluate your finances

Review your income, expenses, and existing savings. Understand your monthly living costs, including rent or mortgage, utilities, groceries, insurance, and debt payments. This assessment provides a baseline for determining the size of your emergency fund.

  1. Set a realistic monthly goal

Break down your overall target into manageable monthly savings goals. Consistency is key; even if the amount seems small initially, regular contributions will accumulate over time.

  1. Open a dedicated savings account

An emergency fund is meant to be money you can access immediately so it’s more advisable to keep it in a savings account. Establish a separate savings account solely for your emergency fund. This separation helps prevent accidental spending and ensures the fund remains intact for genuine emergencies.

  1. Automate your savings

Take advantage of automated transfers to ensure a portion of your income is consistently directed to your emergency fund. Most banks allow you to set up automatic transfers on specific dates, aligning with your payday.

  1. Cut down on unnecessary spending

Identify areas where you can trim discretionary spending. Cutting back on non-essential expenses allows you to redirect funds toward your emergency fund, accelerating your savings progress.

  1. Utilize windfalls and bonuses

Allocate unexpected financial gains, such as tax refunds, work bonuses or monetary gifts directly into your emergency fund. Windfalls can significantly boost your savings.

  1. Periodic review and adjustments

Life circumstances and financial priorities may evolve over time so you should regularly reassess your financial situation and adjust your savings goals accordingly.

  1. Avoid the temptation to dip into the fund

Reserve your emergency fund for genuine unforeseen circumstances. Avoid using it for planned or non-urgent purchases. The discipline to preserve the fund ensures it remains a reliable safety net.

Consider insurance for added financial resilience

While you are building your emergency fund, consider health insurance. While an emergency fund can provide financial assistance for unforeseen expenses, being covered by health insurance can help you pay for medical-related expenses such as hospitalization, medication, medical exams and doctor’s fees, which your emergency fund might not be enough to cover.

You can start with affordable health coverage like KanMend Critical Illness Insurance or The One Critical Illness Insurance, which can be an added protection as you build towards your financial resilience. Or you can opt for a comprehensive plan depending on your budget.

After successfully building an emergency fund, exploring additional financial instruments is a wise step. Investment-linked life insurance combines life protection with investment opportunities, offering a dual benefit of financial security and potential monetary gains.

Building an emergency fund with mother

Building an emergency fund is a step in the right direction

At the end of the day, an emergency fund is a proactive and empowering step toward financial resilience and stability. Financial resilience is the ability to withstand financial shock such as income loss and illness by having the means to bounce back and carry on with your plans because you prepared early. 

By following a systematic approach to building one, you can strengthen your financial resilience. Additionally, exploring options like health protection and investment-linked insurance can contribute to a comprehensive strategy for long-term financial well-being.

Remember, the journey toward financial resilience is gradual, and each step you take brings you closer to a more secure and stress-free financial future.

1 Filipinos Focus on Building Financial Resilience Amid Economic Uncertainties, TransUnion Q4 Consumer Pulse Study, November 2023