Within a year, one of my daughters had to move from one company to another. But she apparently took to heart her parents’ advice of not resigning without having a replacement job already lined up.
My daughter may live with my wife and me, but the fact of the matter is that being jobless for even one week costs money. She had investments in the bank, but it took five working days for her to get them each time. Due to this and other factors, her savings for that year were diminished significantly.
Still, this kind of situation was better than having no savings at all to buffer her during the times she had no salary. She maintained what is called in personal finance as emergency funds.
Emergency funds are meant to cover unforeseen and unplanned events, the rainy days. Deep down, who really wants to plan for something like medical expenses or extensive car or house repairs? It’s like admitting that we and to some extent, our belongings, are not invincible. Emergency funds are also meant to keep you afloat for a few months in case you find yourself unemployed or made to retire early or otherwise unable to work. As the song goes, rainy days and Mondays always get you down.
But planning for rainy days can spell the difference between simply dipping into ready savings and borrowing money from several different sources, and with interest to boot.
Ideally, emergency funds should amount to 3 months of expenses for the employed and up to 6 months of expenses for the self-employed. And since emergency funds are based on average monthly expenses, it stands to reason that a Spartan way of life will also require smaller-sizedemergency funds. To add, emergency funds do very little to help prepare for life’s other major goals like sending children to school or retirement. By their very nature, emergency funds must remain liquid. Liquid funds will earn very little interest income in short-term instruments like time deposit, treasury bills and short-term commercial papers.
There is another type of emergency fund that is designed to cover life’s medical emergencies. This type of emergency fund can be had with minimal outlays through (temporary or permanent) disability insurance, personal accident insurance, hospital income benefit insurance and critical illness insurance. These benefits are normally riders on a life insurance policy.
So while rainy days may get you down, emergency funds will help you get back on your feet in the quickest time possible. Talk to your financial adviser on how best to create and maintain your emergency fund.
(Originally written by Efren Ll. Cruz, RFP at http://www.savingstips.com.ph)
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