Back to Basics: Building Your Emergency Fund

Life is full of many surprises, both good and bad. For the prepared, there is no such thing as a bad surprise. Financial preparedness begins with having an emergency fund, which is your primary insurance against unforeseen, usually undesirable events.

A rule of thumb is to build an emergency fund amounting to around 3 to 6 months of your monthly income. As simple as it sounds, it is interesting to note that in the Philippines, savings rate remains to be low, with only 1 out of 4 Filipino households having savings. This puts around 75% of Filipino families in a vulnerable position when faced with emergency situations that would require sizable, readily available money to spend. Building your emergency fund may seem like a daunting task, but going back to basics might help you get things going.

Monthly expenses should factor in recurring expenses on housing, food, utilities, health care (including insurance), transportation, personal expenses, and paying-off debts, if any. Other items that can be classified as non-essentials are things or activities that you can forego in the unfortunate event of job loss or when money is tight. Examples of these expenses are leisure and entertainment, dining out, nonessential shopping, and vacations.

Here are some factors that may affect your emergency fund goal amount:

Job security: Your target emergency fund depends on your current work condition. The more uncertainty there is surrounding your income, the higher emergency fund goal you should set. Freelancers or those with variable/commission-based income fall under this category.

Work skills: The marketability of your work skills in relation to the current work environment should affect how much emergency money you should keep. Basically, you should allot more money into your emergency fund if there are uncertainties in job security.

Other possible emergencies: Sudden job loss is just one of the possible emergencies that highlights the importance of having an adequate emergency fund. Your family’s overall health condition should also be considered when building your emergency fund. If any family member faces risks to their health, then a bigger emergency fund goal is appropriate.

Your emergency fund needs to be kept safe, reliable, and accessible. It should be placed in an account that makes it truly available for emergencies, where accessing it would not cost you anything. Open a separate savings account solely for the fund to shield it from any unnecessary spending that isn’t considered an emergency. Sure, it wouldn’t earn significant interest on it, but after you’ve established your emergency funds are you only really ready to seek out higher-yielding instruments for investing.

Before you dip into your emergency fund, here are the three questions you need to ask yourself:

Is this event unexpected?

Two common unexpected events that are considered as emergencies are job loss and serious damage to properties (like your house or vehicle). Losing your job means your emergency funds will support you and your family until you find new work. Expenses related to any serious damage to properties (like in the event of flooding or damages from thunderstorms) can be supplemented by your emergency fund in order to quickly restore them to their useable state.

Is it necessary?

Although needs are often confused as wants, know that they are actually miles apart.

Ex: At the start of the rainy season you suddenly discover that water is leaking through your roof.

Should you use your emergency fund for repairs? Yes. This is an expense that you can’t say “No” to…unless you want to have an indoor swimming pool.

Is it urgent?

Events that need immediate fixing can be covered by your emergency fund.

Ex: You accidentally slip and suddenly need medical attention.

Should you use your emergency fund and for medical treatment? Yes. This is an expense you can’t delay to a later date.

Having a sufficient emergency fund allows you to have the confidence to focus on life's more important parts and lets you to enjoy the fruits of your hard work. Just as your emergency fund plays an important role in ensuring your financial preparedness for household risks, life insurance is a crucial ingredient in protecting your interests from other risks both in the near-term and long-term.

Be prepared for any of life's uncertainties with BPI-Philam's Life Ready Plus—a perfect partner to keep you financially prepared so you can focus on enjoying life's positive surprises, while rewarding you for being healthy!

Life Ready Plus, like it's name suggests, helps you be life-ready, easily. Its affordable starting point allows you to get started in building up your savings and investments while staying insured against life's risks. The unit-linked insurance allows you to build up your wealth while your funds are managed by experienced investment professionals. You may also choose to top-up your investments, or choose from various additional benefits through unit-linked riders (ULRs). Stay insured and get rewarded with a one time bonus (up to 50% of your regular premium!) on your 15th year of coverage. Staying insured means you not only stay protected, but your investments are also boosted; affording you more flexibility to enjoy life with your loved ones—worry free!

Life Ready Plus is part of the BPI-Philam Wellness Series. Those who strive to live a healthy lifestyle are rewarded with additional coverage. For example, being an active Philam Vitality member alone gives you an upfront 20% additional coverage and supplementary benefits as you make healthy choices with Philam Vitality. In order to maintain this, you need to follow the Vitality program. When you improve your Vitality status and make sure it stays that way every year, you can get as much as 50% additional coverage on the succeeding years.

To take the first step on living longer, healthier, and better, head to a BPI branch near you or check the BPI-Philam Wellness Series.