Take Charge of Your Money
How much to set aside for a rainy-day fund
INQUIRER.net
First Posted 10:28:00 02/26/2008
Question: I know I need to have a savings fund in case of emergencies, but it is not easy to have one because of so many other obligations. Advice from money experts ranges from three months to six months worth of expenses. How do I know how much I will need? Is there a formula I can use? - Gladys G.
Answer: It is difficult to start saving when bills are endless and each month seems longer than usual. But saving is one of those things in life you must not postpone, or worse, ignore.
According to the recently released Citi Fin-Q survey , a study designed to measure the financial quotient (FQ) or financial intelligence of Filipino consumers, more than half of the 400 respondents aged 18 to 40 years old believe in the importance of saving.
"The problem lies in having the discipline to do so, which could be due to lack of resources or financial know-how," says Mark Jones, Citibank Philippines' Country Business Manager.
The survey also revealed that only one out of 10 Filipinos is consciously saving up for retirement. "The rest have some savings but don't know if it will be enough, others have no idea at all on how much they need or have not started planning," says Jones.
And here's a matter of concern: According to Jones, if the respondents lost their jobs tomorrow, or fall ill and cannot work, it will only take nine weeks (or just a little over two months) before their savings run out.
Nine weeks. That may not be enough to get back on one's feet. Thus, there is a need for an emergency fund that should cover anywhere from three months' to six months' worth of expenses. This will help you tide over the tough times until you get back on track. Besides, borrowing money to cover emergencies will cost you more.
Should you save for three months' or six months' worth of expenses? Some financial experts advise only three months' worth of expenses in the emergency fund if you are employed. If you are self-employed, they say you'll need six months' worth of expenses.
But of course, the more you save, the better. You do not know when bad things may happen and for how long they will last. Save at least six months' worth of your expenses - living expenses, bills, saving for a child's education, and the like.
As to your big challenge: How to save for an emergency fund when there doesn't seem to be enough funds in the first place.
Here are some tips:
1. Stick to your goal. If you say to yourself that you will start an emergency fund, be committed to do all it takes to fulfill that goal.
2. Review your obligations. You mentioned that you have "so many other obligations." Study your list and find an expense you can cut down. For example, if you haven't been going to the gym at least three times a week, then you may be better off canceling your gym membership. The savings you will get from canceling the monthly dues can be channeled to your emergency fund. You can find another exercise alternative that won't cost you money, such as walking in the park.
3. Before spending anything for the month, save first. Once you get your paycheck, set aside some money for your emergency fund. Start with at least 10 percent, and increase it as you free up more obligations. Making saving a priority will be beneficial for your financial future.
4. Open a separate account for your emergency fund. This will help you to avoid dipping into your emergency fund for living expenses.
5. If you have a sideline income or receive a windfall (example: bonus or prize money from a contest), use this to pay off your debts, then put the rest in your emergency fund.
6. Cut down on expenses that you can do without. These may include weekly trips to an expensive coffee shop, or going for designer clothes. Just think: if your family is in need or has an emergency, you wouldn't even think of these things. But you will rack your brains thinking of how to meet the family emergency with your meager funds. Thus, prioritize the emergency fund.
When you have enough funds in your bank account, move your emergency fund to a higher-yielding form of investment, such as a time deposit, money market placement or even bonds and stocks.
According to the book The Citibank Guide to Building Personal Wealth, "Moving your surplus cash into other investments does not necessarily mean that you won't have access to it in a real emergency. Bonds, equities, and mutual funds can normally be sold very quickly."
By moving your cash to a higher-yielding investment, you may protect your fund from the effects of inflation. Before investing, please be aware of the potential benefits and risks of higher-yielding investments.
The emergency fund is so called because you will only turn to this when real life emergencies happen, such as when you lose your job, or get really sick, or when tragedy strikes in the family. Make this your immediate financial goal this year.
(INQUIRER.net and Citibank invite readers to ask questions regarding financial matters. Send your questions to personal_finance@inquirer.net or comment through our personal finance blog called MoneySmarts )
*Disclaimer: Readers are solely responsible for their own investment decisions and should thus conduct their own research and due diligence and obtain professional advice. INQUIRER.net will not be liable for any loss or damage caused by a reader's reliance on information obtained from our web site. INQUIRER.net receives no compensation of any kind from companies or industries or funds that are mentioned here.
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