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Randell Tiongson is an advocate of Life & Personal
Finance. He is a Director of the Registered Financial
Planner Institute (Phils.) and has over 20 years
experience in the financial services industry.
For questions, write to randell@randelltiongson.
com. To read his personal finance blogs, visit
http://www.randelltiongson.com/.
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wealth management
Gearing Up for an Emergency
Here’s one of the most fundamental objectives one should prioritize -
setting up an emergency fund.
by r a n d e l l t i o n g s o n
It is foolish to think that we will
never undergo an emergency in life
and most of the time emergencies
cost a lot of money. In my seminar
Steps to Financial Peace, I talked
about setting up an emergency
fund as the 3rd step to achieving
financial security.
Before starting an emergency
fund, it is best if you know how
much you actually spend in a
month. Many people I know are
clueless as to how much they spend
monthly.
If you already have a monthly
figure, you are now ready to start
building your emergency fund.
The rule of thumb for emergency
allocation is somewhere between
3 to 6 months of your monthly
expenses. 3 months is good, 4
months is better, 5 months will be
great and 6 months is excellent.
Emergency funds come in handy
for a variety of reasons: medical
emergencies, loss of employment
and so forth. You should also be
sensible in determining what an
emergency is and what it is not. A
42” flat LED TV that is on Sale is
definitely not an emergency.
Here are 3 good reasons Why should you
set up an emergency fund? :
1) Emergencies do happen: It is
foolish to think that emergencies
will not happen to you. Things
do come up that you have not
planned for and you’re going to
have to provide for them.
2) Relieves stress: Having an
emergency fund has an added
bonus — peace of mind! You
will feel relieved because you
no longer have to worry about
most small emergencies. Once
you get your larger emergency
fund saved, you won’t have to
worry about paying for most
large ones either.
3) Risk reduction: You are less
likely to go into debt because
you are able to plan ahead.
Starting an emergency fund
is not easy but this is definitely
something we should prioritize.
Dave Ramsey suggests we do it by
‘baby steps’. Do it in stages like 1
week worth of expenses first, and
then move to 2 weeks, to 3 weeks
and so forth. Keep a piggy bank or
an envelope where you can place
your emergency fund. My wife and
I have this big transparent piggy
bank. Once the amount reaches
P3,000 to P5,000, we transfer it to
our savings account/emergency
fund. We take baby steps too.
Here are some tips:
1) Keep your emergency fund in
cash or near cash placements
like savings, current, time
deposits or Special Deposit
Accounts (SDA). Do not invest
your emergency funds yet
as those are intended to be
a buffer or a margin for your
finances. Make sure that the
deposits can be withdrawn
quickly and without huge
penalties.
2) Keep some of those funds in
an ATM account, say 2 weeks’
worth. Emergencies do not
necessarily occur during
banking hours.
3) Once you have achieved an
ideal 6 months emergency
buffer, start investing in better
yielding instruments like
marked to market funds (UITF,
Mutual Funds) because said
instruments should perform
better in the long run. If you
keep all your money in low
yielding deposits, its value will
ultimately erode because of
inflation.
Gear up for an emergency
because it is the wise thing to do.
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