Monday, August 20, 2012

Emergency Fund Planning: How To Plan On Your Emergency Fund

Planning for your emergency fund is a boring yet important aspect in personal finance. I mean, the first time I’ve done it, it took me several months to really build my emergency fund. In fact, I am still on the process of  building my funds because there are some situations that I cannot help but get something from the fund.  During the time when I was saving, a lot of things came up so I have no choice but to get money from my small stash that is supposedly for emergencies. At least, it has served its purpose.

Defining What Emergency Fund Is

So what is an emergency fund? As discussed on the previous post, an emergency fund is a stash of money that is equivalent to at least six months of your salary. Having an emergency fund is very important because they serve as your fallback should something happen to you and your finances. Let’s say for example you got laid off. Of course, it is impossible for you to find a job replacement within two weeks. By using your emergency fund, you will be able to live comfortably even if you don’t have a job.

However, not everyone welcome the idea of saving up six months worth of their salaries. This usually means giving up on some luxuries like movie night outs, eating out in your favorite restaurants weekly and so on. This is the reason why lots of people end up using their credit cards as the source of their emergency funds.

Unfortunately, using credit cards is a bad plan even if you are using a 0% interest card. Using credit cards for emergencies will end up in you paying your debt out of a bad situation. Besides, a lot of people use their credit cards to make “emergency purchases”.  Thus said, it is important that you use cold hard cash as your emergency fund.

Where To Keep It?

To keep your emergency fund, it is important that you keep it in a vessel that is easily accessible. While your piggy bank is the best choice to keep your money, it is better if you divide your emergency funds into two equal parts. Half of the money should go into a 30-day renewable time deposit while the other half should be deposited in a bank. I prefer a passbook over ATM since I am not tempted to use the money in the emergency fund unless it is a real emergency. Moreover, you do not keep your money idle inside a bank unlike piggy banks.

 How To Save For Your Emergency Fund

A lot of people live from paycheck to paycheck ( I know I am). To save for your emergency fund, you need to learn the principles of “save and spend”. This means that as soon as you get your paycheck, you need to designate a particular amount as your emergency fund. As soon as you save money, you can use your money to pay for your bills or buy the things that you need. Now here comes the most challenging part. When you pay yourself first, you need to set your financial priorities right. For the sake of saving, you might need to give up some of your money-spending habits. This can be a pain for most people but still worth it in the end. Do not stop saving for your emergency fund until you reach the six months worth of salary. Let me warn you though that you will not be able to save straight for six months because there would be emergency situations that will require you to get something from your fund. In my case, I am back to square one after we encountered an emergency with our toilet bowl so I guess, just like you, I have to start saving again once I get my paycheck next week.

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