Having an emergency fund is a must in any financial plan as we do not want to touch the savings we have for our children’s education or the retirement fund we diligently built-up when some unforeseen events happen.
Although the pandemic disrupted this principle especially those who lost their jobs or got saddled with sickness, this simple guide remains to be relevant: a prescription of at least 3 to 6 months of your monthly cost of living and if you have more savings, it is better to put the excess in an investment fund that gives you better returns.
But first, why is an emergency fund important? Quoting Zach Buchenau, a personal finance expert (https://bethebudget.com/why-is-an-emergency-fund-important/) “emergency fund is important because it acts as a financial cushion in the event of an unexpected expense. Whether it be medical bills, home repairs, or a family crisis, an emergency fund can help you steer clear of debt, protect your assets, and avoid unnecessary financial struggle.”
So how do we build an emergency fund? Here’s a simple guide: Read more at https://www.saveandinvest.org/military-everyday-finances/start-emergency-fund
- Chart your monthly income and expenses. This will help you determine not only your monthly cost of living but can also help you identify where you can cut expenses in order to set aside for the rainy days.
- Set your emergency savings goal. As I mentioned earlier, a quick guide is 3 to 6 months.
- Develop a plan to start saving. For some, cutting costs is a must and tracking your expenses can help you find what items you can give up to give way to savings.
- Put your emergency fund in an accessible place. A regular bank savings account is a good place for this as you can access it without paying penalties. As such, do not mind the very low interest rate as that is the reason why you can withdraw it anytime.
- Stick to your plan. It may not be easy as there are lots of reasons we come up with why we can’t set aside the amount regularly until the fund goal is reached but resist the temptation and stick to the purpose of the fund – it should only be used for Emergency.
I must add that expenses like tuition fees are not “emergency” expenses as these are scheduled and can be planned ahead. There are health plans that can help cover medical expenses and it is always advisable to get covered for these expenses too.
Finally, this Covid-19 pandemic has exposed our financial vulnerabilities and has taught us so many lessons including ensuring having a sufficient emergency fund, having health plans and insurance coverage. Let us not waste these lessons by not acting on them and plugging the holes in our financial plan.
Let’s not take for granted setting up an emergency fund anymore. It’s one lesson from this pandemic that we must learn and act on.