Before you make an investment or even save up for a big purchase like a car or a house, you should consider setting aside money as an emergency fund. This can help you get by in times when something unfortunate happens and you need additional money to cope.
The first question to ask: How big should your emergency fund be? You should consider three months’ worth of living expenses, but the equivalent of six months would be better.
To figure out your living expenses, answer the following:
First, how much do you spend on utilities? If your electricity and water bills add up to around PHP 2,300 every month, round them up to PHP 2,500. If you pay rent, add this as well.
Next, compute how much you spend on food. If you do the groceries, add the amount you spend on groceries each month. If you eat out a lot, get the average meal cost and multiply it by 90 (3 meals a day for 30 days).
Finally, compute how much you spend on transportation. Take your average commute costs and multiply it by 60. This factors in going to work and back for 30 days.
So, the computation for your monthly living expenses will look like this:
(Your utilities and rent rounded up) + (your monthly groceries OR the cost of an average meal * 90) + (Your average commute cost * 60)
Take all of that and multiply it by 3 (or 6), and the result is how much your emergency fund should have.
Should something bad happen, your emergency fund will help you get by. Don’t factor in things like movie tickets or vacations, because these are luxuries that you can skip for the moment. You’ll be able to do all those once you’re back on your feet.
Saving for an emergency fund
The right amount for your emergency fund might seem like a very high number, but with a little discipline you’ll be able to reach it.
Here’s an effective way to do it: Set aside 10% of your monthly take-home pay either every payday or at the start of the month. Avoid doing this at the end of the month because you might be tempted to spend your money instead of setting it aside.
If you’re able to spare more money, save 20% of your monthly income or even more so you can have your emergency fund sooner. The important thing is you regularly set aside money for a rainy day.
