What is an Emergency Fund?

An emergency fund is the money you set aside to cover your unexpected expenses. They’re savings intended for emergencies and unanticipated costs. It’s money reserved to keep you financially secure during unforeseen events like sudden medical expenses, home or car repairs, cash flow problems, and sudden layoffs. 

Importance of having an emergency fund

Certain situations can leave us financially vulnerable if we don’t have enough funds to pay for them. While credit cards, multipurpose personal loans, or collateral loans like OR/CR Sangla, may be an option… having your own emergency fund would put you at ease during tough times since it’s money you can use immediately. 

Difference of regular savings from an emergency fund

While both your regular savings and emergency fund are money set aside for the future, both of them are intended for different purposes.

	Emergency Fund	Regular Savings
Purpose	For unplanned expenses.	For planned expenses and financial goals.
Use	For emergencies, such as, but not limited to:Unforeseen medical expensesCar or home repairsLoss or lack of income	For specific purposes, such as, but not limited to:EducationWeddingTravelBig PurchasesRetirement
Amount	Ideally, able to cover living expenses for 3-6 months	Depends on the financial goal, and how long you plan to save for it.
Availability	Easily accessible and ready to withdraw and use any time. Usually kept in a savings account.	Can be cash or liquid, and sometimes placed in higher-yield accounts, insurance, or other investments.

Why You Need an Emergency Fund

Having your own emergency fund is key to achieving financial security—one of the financial goals we should strive for. Becoming financially secure allows you to enjoy benefits, such as, but not limited to:

• Having financial stability
• Enjoying freedom to pursue opportunities without fear of lacking money (e.g. starting a business or changing jobs)
• It equips you to plan for long-term goals, like owning a home or retiring
• It prepares you for uncertainties

11 Examples of Situations Where an Emergency Fund is Essential

1. Covering living expenses during unemployment or lack of income
2. Paying for medical emergencies or treatments not covered by medical insurance or health care
3. Repair fees for sudden car breakdowns or accidents
4. Repair fees for urgent house problems, such as leaks, plumbing, or pest control
5. Transportation or travel for urgent matters or family emergencies
6. Veterinary bills for pet emergencies
7. Expenses after natural disasters, such as handling the aftermath of floods or earthquakes
8. Family emergencies that may require financial support
9. Payment for unforeseen legal issues or settlements
10. Payment for unforeseen tax bills or liabilities
11. Replacing essential household appliances that unexpectedly broke down, such as kitchen or bathroom appliances

Building your emergency fund is one step to being financially secure because it helps you cover expenses for unforeseen events:

• It gives you peace of mind. Knowing you have money to pay for emergency expenses reduces stress and anxiety.
• It helps you become financially independent. Setting aside money for emergencies enables you to handle unforeseen costs without needing to rely on others.
• It prevents financial strain. Since you’re prepared for the unexpected, you can avoid financial decisions that could put you in financial trouble.
• It helps you achieve financial security. Having an emergency fund helps you have enough resources and money to cover your expenses, especially unexpected ones.

How Much Should Be in Your Emergency Fund?

A good start is to set aside enough money to cover your living expenses for three to six months. This should be enough to manage some unexpected situations.

How to Calculate Your Emergency Fund

1. Calculate Your Monthly Expenses. Know how much you spend per month for things like rent, utilities, groceries, transportation, and bills.
2. Multiply by Number of Months. Choose how many months of living expenses you want your emergency fund to cover, preferably at least 3-6 months.

Factors to Consider

Figuring out your emergency fund starts with knowing how much your living expenses are. As you compute your monthly expenses, make sure to keep in mind the following:

• Basic living expenses (e.g. bills, food, groceries)
• Job stability or monthly income
• Family members or dependents who rely on you financially
• Possible medical or health expenses that won’t be covered by your HMO or healthcare
• Loan payments that you need to pay regularly
• Other expenses you’d like to cover in case of loss of income

How to Create an Emergency Fund

1. Set a goal amount. After knowing your monthly expenses, aim to save enough to cover 3-6 months of expenses.
2. Have a separate savings account. Separate your emergency fund from your regular spending money to avoid using it for non-emergencies.
3. Check your budget. 
4. Review your budget. Check your current budget, and check if there are costs that you can cut back on to help you reach your goal amount faster.
5. Set aside money regularly. Set up automatic transfers or reminders to transfer money from your earnings to your emergency fund account.
6. Start small, and grow. You can start setting aside little money to slowly build your emergency fund, and then increase it when your budget allows.
7. Set aside bonuses or extra money. If you can afford to, you can set aside a portion of your 13th month pay, bonuses or tax refund, and put it into your emergency fund.
8. Monitor. See how your emergency fund is growing, and adjust your budget as needed so you can stay on track to reaching your goal.
9. Stay committed. As you establish your emergency fund, avoid temptation, and have the discipline to use it for emergencies only.

Where to Keep Your Emergency Fund

Finding the best place for your emergency fund is key for both security and accessibility. Here are some account types you can consider when choosing where to put your emergency funds.

Account Type	Pros	Cons
Savings Account	Easy to open, access, and use your money quickly	Lower interest rates
	Insured by the Philippine Deposit Insurance Corporation (PDIC)
High-Yield Savings Account	Offers better interest than regular savings accounts	Usually only offered by digital banks
	Easy to access your money
	PDIC-insured
Money Market Fund	Usually gives higher interest rates than regular savings accounts	Has a minimum balance required
		Only limited transactions allowed monthly
Time Deposits with Early Withdrawal Features	Offers higher interest rates if you keep your money in for a fixed time or period	Your money has to stay in the account for a set time. If you take it out, you’ll need to pay a fee
	PDIC-insured	Not accessible for urgent and emergency expenses

Managing and Growing Your Emergency Fund

By saving regularly and making financially responsible decisions, you can manage and grow your emergency fund. Here are some tips to help you reach your goal amount:

1. Prioritize setting aside your income for savings before spending.
2. Commit to your goal amount.
3. Increase your savings when you can afford to, or when you get a pay raise.
4. Be consistent in saving money.
5. Have the discipline to avoid touching your savings and making impulsive purchases.
6. Check your savings, and see if you need to adjust your budget as needed.

Regularly looking at your budget, and making changes is important for managing your money well. It helps you save, stay on track with your goals, and handle unexpected costs. Here are some reasons why regular budget reviews are helpful:

1. Align with lifestyle changes, such as, but not limited to salary increases, new expenses, or inflation.
2. Helps you focus on your goal amount, and see if you’re on the right track.
3. Reminds you to stick to your budget, and avoid unnecessary expenses.
4. Shows you your financial health, and gives you an idea on how prepared you are in case of unforeseen events or emergencies.

FAQs

What is an emergency fund?
It’s money saved for unexpected costs and unforeseen events.

Why do I need one?
It gives you financial security during emergencies, and helps you avoid financial strain due to surprise expenses.

How much should I save?
Rule of thumb is to aim for at least 3-6 months’ worth of expenses, but you can be adjusted based on your needs.

How to start saving?

1. Set a goal: Decide how much to save.
2. Budget: Revisit your budget, and see what you can cut down.
3. Set aside money: Regularly transfer money to build your emergency fund.
4. Start small: Start saving little by little, and then increase over time.

Where to keep it?
Place your emergency fund in an easy-to-access savings account–preferably, in one that earns interest.

When to use it?
Have the discipline to only use it during emergencies.

How to maintain it?
Make sure to refill it in case you spend a portion or all of it.

Conclusion

Having an emergency fund is a key part of financial security. It helps you handle unexpected expenses, and eases the stress of unforeseen problems. 

If ever you find that your emergency fund is not enough, applying for a multipurpose cash loan is an option you can consider. Before you avail of a loan, make sure to understand its terms and conditions, interest rates, and repayment schedules. Additionally, make sure to borrow from trusted and legit  formal lenders that are regulated by the Securities and Exchange Commission, and supervised by the Bangko Sentral ng Pilipinas. Taking out a loan from formal lenders, like SB Finance, will protect your rights as a borrower, and protect you from unfair interest rates. 

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