Setting up your emergency fund-A A +A
Wednesday, July 9, 2014
LIFE is full of surprises. Others are pleasant while others make you feel like the floor you’re standing on just caved in.
Theoretically, we know that there will be trials along the way, but sometimes the fear of thinking about it leaves us unprepared and reeling from the blows.
Wise men say that the only way we can be free of that fear is to face it head on. That is why financial experts recommend that aside from increasing our income and saving smart, we should set up a separate “emergency fund” for life’s rough turns and tumbles.
An emergency fund is separate from a regular savings fund and an investment fund. It must be liquid (in the form of cash to meet immediate and short-term obligations or assets that can be quickly converted to meet the same obligations) and therefore advisable to be in a regular savings account, a checking account or with an ATM account as its purpose is for sudden withdrawals.
The practice of setting aside this fund is to be able to veer away from the high cost of interest from getting a loan or charging through a credit card for unexpected events.
A highly conservative emergency fund is computed by pretending that nobody in the family can earn anything in the next six months but all the expenses stay the same. It may be illustrated as:
Gross monthly expenses x 6 months = Emergency Fund needed to be set aside
If you are just starting out on your emergency fund, you may feel overwhelmed by the six-month figure needed to be set aside. You may start with a three-month period computation. You may also take baby steps by opening up an account exclusively for emergency fund with your preferred bank and by making sure that you put in regular deposits until you have reached your goal.
Make this a priority, as the biggest purpose of your emergency fund is to shield you and your family from the sudden loss of income brought about by business failures or job loss. It will be a fund that can also readily supply what is needed for basic repairs, children’s needs, and elderly care.
It is good to note, though, that an emergency fund cannot shield us from major life crises such as critical illnesses that require months or even years of intensive and multiple treatments, major accidents or total disability, and major home accidents such as fire.
For these calamities or disasters of life, we will need a bigger and more comprehensive protection called “insurance,” a topic which deserves a more detailed discussion in the next columns.
There is no single catch-all formula for financial security, but making sure that we have at least prepared an emergency fund can certainly ease some of our worries with regards to sudden financial roadblocks.
Published in the Sun.Star Bacolod newspaper on July 09, 2014.