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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.”
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.
I was recently invited to share my thoughts with almost 400 delegates of the 1st Virtual Youth Congress organised by the Rotary Club of Makati Jose P Rizal. It was a mutually meaningful talk based on the feedback of the very engaged attendees and at my end, it was quite inspiring to do my own share of addressing the still prevalent “sandwich generations” among Filipinos.
I call it “sandwhich generation” when children take care of their ageing parents at retirement (because they have not prepared for it financially) while they take care of their obligation to their own family…thereby affecting also their capacity to prepare for their own retirement.
I shared with them my own vision board that I drew 22 years ago. It is a crude representation of the future that I then want but it has served as my guide and the basis for a more comprehensive financial plan that i diligently implement. I am happy to say that all except two goals (we were only blessed with one child and at my age, I can’t bear another one (sigh) and the brand of dream car that I now find impractical to buy).
My crude Vision Board reflecting the future that I want which I drew 22 years ago.
I outlined 4 steps as a guide in preparing one’s road map towards Financial Wellness:
Envision – Know what you want in every stage in your life. Visualise how the future looks like for you. Just the broad strokes.
Plan – Put a price tag to the future that you want. Once you know what you want, you can then determine how much fund you need to build-up between now and the time you need it. The key word is “build-up” which requires you to start early to take advantage of the time horizon where you can grow your money.
Execute – Start putting the elements of your Financial Plan. One thing we discovered about investing is that people generally have a mismatch of their goals and the investment vehicle they use. For example, a young couple wants to start early in setting up the college education plan for their 2-year old child and yet, they put their money in a savings account with little or negligible interest income. A basic principle in investing is that you can take more risks (ie invest in an equity fund that may be more volatile) if you have a longer time horizon.
Track and Review – Our goals and aspirations change so it is important to track and review where we are so far and make the necessary adjustments while we still have time.
I closed by reminding the delegates that their youth is their main advantage and they must not waste it by starting early and making the right choices.
We oftentimes say, life begins at 40 and for some, it means it’s time to get serious with life but do we really start when we are already halfway though life?
“The day you plant the seed, is not the day you eat the fruit.”
Dr. Sanjay Tolani
With life expectancy of 80 years, 40 means we only have 20 more years or 7,300 days to make a difference in either being financially independent in our old age or being a burden to our children, who, by then, would have their own responsibilities to a carry.
Life begins at 40 should mean, we have done a pretty good job at preparing for the best phase in our lives by the time we are halfway through life. Then and only then, can we say, that indeed, life begins at 40.
Look back…have you done what you should have done? Your answer must give you the urgency to either do more or continue what you have started. As Tennessee Williams said, You can be young without money, but you can’t be old without it.
For more appreciation of this concept, watch Dr. Sanjay Tolani’s you tube video on 28,000. It will make you do a reality check just as it did to me. https://youtu.be/hV_rDPEpLEc