Adulting 101: Consider these things when setting up your emergency fund
Yesterday we established what emergency fund is and why it is important. Today let us try to figure out the things that ome must consider when setting up an emergency fund. You have to remember though that this is a personal decision so what might work for me might not work for you. Make sure to think deeply about your own life when setting up your emergency fund.
Just a quick disclaimer that this article is not meant to be taken as a financial advice. I am not a professional financial advisor so DYOR is highly encouraged before making a decision.
This article will be divided into three sections. The first one will be about what to consider for your emergency funds. The next one is where to put your emergency fund. And the last will be about keeping cash on hand.
What do you have to consider?
The first one is knowing your role in the household. Are you single? Do you have any pets that need to be taken care of? Are you living with your family? Are you the breadwinner for the family? Do you own your house or do you pay rent monthly?
These are some of the questions that you can ask yourself first to get started. By doing this you will have a clear view of where you stand and what your responsibilities are. This makes it easier for you to see the effects that an emergency will have on your family.
After answering the question, you can list down all your regular expenses. What I mean by this is the expenses that you have monthly such as rent, any credit loans, groceries, transportation fees or gas, monthly bills, etc. These are the expenses that you will not be able to escape from no matter how tight your budget is since they are necessary. So take them into consideration when making your plan for building up your emergency fund.
The next thing you have to take into consideration is your monthly income. This includes the payment you receive at your job and any side hustles you have. This way you can see how much you can allocate every month or every payday for your emergency fund.
Building up your emergency fund takes time so do not feel pressured if you come up with a large amount. The fund should usually 3-6 months equivalent of either your monthly expenses or your monthly income. It is up for you to decide.
Another thing that you have to consider is your debts. We will discuss this sometime in the future articles of this series but I will put it here now since I believe it is important. Debts with high interest rates will be harder to get rid of the more you put off paying the whole debt itself. So while planning your emergency fund, you have to take into consideration if you are putting more than enough money to pay off your debt.
Your emergency fund might end up drained if you are shouldering massive amount of debts wkth high interest rates. You can still build your emergency fund while paying off debts of course, you just have to make sure that you take it into consideration.
Where should you put your emergency fund?
Since emergency fund is for urgent matters, it is important to put it where you can easily liquify it. Imagine if you invested your emergency fund in real estate that you would not be able to deal with a better price because you badly need money.
This is why you should put your emergency in a place where you can take it out withing 1-3 days. I am personally building my emergency fund for our family in an online savings bank. I do this since online banks offer higher interest rates than traditional banks. This way, I can keep my money while also enjoying the interest.
You can also put it in some stable investment options. The type where the price is not as volatile. This is a bit riskier but you might feel more comfortable with it than putting it all in a bank.
Wherever you decide to put it, just remember that it has to be in a safe place that you can take out easily.
Should you keep emergency fund in cash?
I believe that a part of your emergency fund should be kept as cash onhand. Why?
Well you never know what emergency might happen. If it is a natural disaster then most likely, the banks will have long lines so you will have to wait hours before withdrawing your money. If it is in an online bank then what will you do if the towers are down and affecting your signal?
Cash will save you in tight situations where you can not immediately access your main emergency fund. Of course, keeping a large amount of cash in one place carries some problems too so make sure that you take the proper measures to ensure its safety. You can put the cash in a sealed plastic to protect it from getting wet in case of strong typhoons. And you can also keep it within reach so that when emergency happen, you know where you can get the cash.
Closing words
The things I wrote in this article are also what helped me in my journey of setting up an emergency fund. I still have a long way to go to get to my desired amount but I am slowly getting there so it is alright. Small progress is better than none.
Anyway, I enjoyed writing this article and I really hope that you enjoy reading it as well.
This is a part of the Adulting 101 series that I am writing. You can read the earlier articles of this series here:
Thank you for reading this article!
If you want to read some more articles of mine, I have monthly summaries here:
December 2021 Articles Summary
November 2021 Articles Summary
Loving this emergency fund series of yours. Reminds me not to fail on sparing some for me to finally finish setting up my own.