What is the secret of those affluent people who seem to easily get ahead financially? Or what are the common mistakes of those who are behind financially?
Which one would you consider yourself in these categories: upper middle class, middle class, average income, or low income?
Regardless of where you fall into, one thing we all have in common is we all work hard. Majority work harder.
It is not surprising that a lot of people, even those with stable and high income job still struggle financially. There is a common ground. Not everyone realizes the importance of having an emergency fund, let alone how much a person should be saving for it.
Any unexpected situation involving finances puts us in a lot of pressure, reason why having a safety net is one of the most important financial allocation we all should consider when budgeting.
So, let’s talk about the basics.
What is an emergency fund?
An emergency fund, or contingency fund, is basically money that you set aside for a rainy day. It is a portion of your income that you gradually save. This money is meant to be accessible at anytime, and only for emergency purposes.
Let’s talk about its importance then we’ll cover ways on how you can efficiently build this fund and how much you should be saving.
Being on top of your finances will provide you with a sense of security – that when something unexpected happens such as loss of a job, a household repair, car that needs fixing, or an increase in rent, you will still be OK because you simply did your due diligence in putting money aside.
Now the big question is how do you build an emergency fund? And how much?
Ideally, you should be saving 3-6x of your monthly net income. I suggest be on the conservative side and save 6 months worth of your net income.
For example, let’s say your average net income is $4,000/month. All you need to do is multiply your monthly net income by your target amount of emergency fund that is specific to your needs and situation. A three month worth of emergency fund amounts to $12,000 ($4000 x 3 months). A six month worth of emergency fund will amount to $24,000 ($4,000 x 6 months).
It is really simple math eh? It is. What’s not simple is the product, $24,000 sounds like a lot of money to save, plus, it takes time to build this much fund. Honestly, it does. But don’t worry!! The good news is, with discipline, it is 100% doable.
And so this is now where the 10-20-70 Rule comes in. If you’re not familiar with this Rule yet, I wrote an article about it so make sure to check that out. It will definitely help consolidate your understanding.
Out of the 70% of your income, you will gradually save an amount that is within your realistic budget. Let say for this month you have an extra $200, and the following month you have an extra $300, what you will do is save this money, every month, consistently, no skipping, until you build your target amount. In this example, you are saving without fail to come up with $24,000 for your emergency fund.
The idea is, in the event that you lost your job or cannot work for some reason, having this contingency fund that is six months worth of your income, this would mean that you will be financially OK for the time being because you have the fund allotted to pay for your bills on time, provide food on the table, and basically live the same lifestyle.
This fund basically buys you some time until you are back on your feet. And most likely, within the next 3-6 months, you have already found another job or recovered before running out of your rainy day budget.
Does this put things into perspective so far?
What about we look at the opposite, which is likely the case for most – not having an emergency fund.
What happens during tough times is that people have no choice but use their retirement savings (if they have any savings at all) in order to pay for their daily needs. Otherwise, they resort to one of the most common and terrible option which is borrowing money and end up paying high interest on loans or credits cards. Sounds familiar? Most of us have been there.
So what is the key take here?
Simple. Do your best and aim to pay all your debts. Eliminate those interest you’re paying so that you can start building your emergency fund. It is when you are debt free that you start your way to financial independence.
But how can you be free of debt in this seemingly unending great depression?
Good question. However, most of us don’t realize the obvious answer because we are not asking ourselves the real question. Why am I in debt?
Try the list below, swipe right on air and see if it matches with you:
- I buy coffee instead of brewing at home. It just tastes better and is more convenient
- My friends tell me I deserve it! So even though I don’t have much, I travel
- Get a life, drink and party, YOLO!
- Add to cart
- I need to change my phone
- It’s on sale!
- Social vices
- Unnecessary subscriptions
- Monthly gym membership that I actually don’t go to
How did you do? Don’t get me wrong though. If you are comfortable and have the means, no one is stopping you. It is your hard earned money. However, if you find yourself living paycheck to paycheck, then I highly advise that you reconsider your priorities.
Well, I do work hard and save but my salary just can’t keep up with high cost of living. What can I do?
If you’re in this situation, there will be a lot of factors to consider which only you can figure out. So let’s go over some possible options.
- Upgrading skills – make yourself more valuable to increase your pay bracket.
- Invest in yourself – instead of paying for unnecessary things, pay for workshops, trainings, and attend seminars.
- Aim for growth and progress – unhappy and feeling exhausted of your job? You likely became too comfortable and not progressing. Challenge yourself by trying new roles.
- Generate extra income – if you don’t know how, that’s a serious problem. We are living in information age. Learn from those who generously share how they did it. Try Brian Tracy.
- Grow your savings – you have to take a risk. Calculated risk.
- Read books – if you haven’t yet, start with Atomic Habits by James clear, and Rich Dad, Poor Dad by Robert Kiyosaki.
There’s a reason why you’ve reached reading this far, so let’s conclude with something simple but crucial: Knowledge is not power. Applied knowledge is. Either you start finding ways on how to start building your emergency fund or just carry on with where you are in life, it is within your capacity what you do next.
I’d be happy to hear your thoughts and ideas on how you plan to start your journey to living a meaningful life and financial freedom, or, if you’re already there, please share how you did it. We can all learn from each other.
Hanggang sa muli!
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