What is Emergency Fund? Is Emergency Fund really important? How is it going to help us financially? How should we be able to save up for emergency fund?

An emergency fund is a money you save up to set aside and use when unplanned financial expenses occur like family crises which can support the unemployment of a family member, health issues, and an abrupt travel expenses due to serious matter. This can also support personal matters like unfortunate loss of job because of company shutdown or retrenchment, mostly during the pandemic.

"Filipinos are somewhat confident with their finances but admit they lack the emergency funds needed to survive if the crisis persists for an extended period of time."

A study from the survey conducted by financial platform “EcompareMo” said that about 71 percent of 1,076 respondents in the country said they lacked emergency fund that would last for more than 3 months, while a total of 735 respondents said they don't have an emergency fund separate from their savings.

The survey showed that the entire Luzon—with the total of 291 reponses, almost 40 percent have an amount of emergency fund that could cover expenses for 3 months or more. Also the survey said 57 percent of the prepared respondents are women.

In a survey conducted by the Bangko Sentral ng Pilipinas (BSP), 77% of Filipino adults do not have bank accounts. The top reason cited for having bank accounts was to save in case of an emergency (42 percent), followed by saving for an education (31 percent) and for business (29 percent). Other uses are for safekeeping (23 percent) and as a form of investment (12 percent).

Emergency fund is important because emergencies happen

According to a financial expert Randell Tiongson’s book, "No Nonsense Personal Finance", setting up your own emergency fund is important because “emergencies do happen”, it is “foolish” according to him to think that emergencies will never happen to you.

“As time goes on, you realize that things do come up that you have not planned for; and you’re going to have to provide for them. Things do happen, and they won’t happen at a convenient time,” said Tiongson

Setting up an emergency fund also “relieves stress” and peace of mind as you will no longer have to worry about any emergencies that might happen.

For many Filipino OFWs and their families, a large portion of their income goes into the acquirement of the latest gadgets, frequent home improvements, and sometimes a brand new car.

According to Ritche Fariñas, Head of the Overseas Filipino Segment of the Bank of the Philippine Islands (BPI), there is nothing wrong with that. But it is also important to know the difference between investing to make money grow, and spending on things that lose value over time.

“High income does not necessarily mean high financial literacy or even financial responsibility,” said Fariñas. “Sometimes our seafarers need to know more about how to handle their high incomes. For many of them, saving and creating an emergency fund are way down their list of priorities. In times of emergency, this lack of savings can lead to financial ruin.”

How much should you save for emergency fund?

Before starting on emergency fund, it is best if you know how much you actually spend in a month.

“Three months is good, four months is better, five months will be great and six months is excellent,” said Randell Tiongson

According to a personal finance website Listen Money Matters, ideally, your emergency fund should be 3-6 months of expenses. It indeed sounds like too much but the total amount you can save up within that span of time could be truly beneficial to your unexpected expenses.

Also, according to saveandinvest.org, putting your fund in an accessible place can help you to start saving up for your emergency fund. The best place for your emergency fund is in a liquid account or accounts where your cash is “easily accessible”. A liquid account might be a regular savings account at a bank or credit union that provides some return on your deposit and from which your funds can be withdrawn at any time without penalty.

Starting an emergency fund plays a fundamental part in order to achieve long term financial stability. Anyone can do it, all you just need is to plan and start.

"A prudent person foresees the danger ahead and takes precautions. The simpleton goes blindly on and suffers the consequences." — Proverbs 27:12