10 things to know to build your rainy day fund
MANILA, Philippines - When I was young, my parents would always tell me two things:
- "Lianne, stop acting like you're a ninja because you're really clumsy"
- "You should start saving money for rainy days"
Back then, I thought they were crazy because they didn't see the potential that I had! I mean, not all ninjas needed to be engaged in combat, right? Some were tactical ninjas like the Shikamaru!
Also, why did I have to I save up for rainy days? Weren't rainy days meant to be enjoyed?
Looking back, I realize that some things have changed: sure, I think they still fail to see the ninja potential I have, but in terms of saving for rainy days, now I see what they mean by,
"A day when rain lightly drizzles is great — it makes you relax and gives you ample time to curl up, read a book and sip hot tea.
"An extremely rainy day, on the other hand, is awful — it scares you out of your wits, gives you flooded roads and inconvenient blackouts. Sometimes, it takes the lives of your loved ones, too."
When rains pours hard and catches you by surprise, do you have an emergency fund to help you get back on your feet?
Here are 10 things you should know about building your own rainy day fund so that you can get started:
1. Not many Filipinos understand its value
As of February 2013, only one out of 4 Filipino households has savings, according to a survey by the Bangko Sentral ng Pilipinas. How much their savings actually are was not investigated.
Can you imagine that only one out of 4 Filipino households are paying themselves first?
The rest of them decide to give all their money away — to electrical companies, malls, restaurants and cinemas.
2. The purpose of a rainy day fund is to protect us temporarily against unexpected events
Simply speaking, we can't stop the rain from pouring. We just need a temporary cushion to shield us until our reinforcements arrive.
If our car is involved in an accident, we need to spend money first before our insurance kicks in. That's why we have our rainy day fund.
If we experience severe chest pain and we get sent to the hospital for emergency treatment, we need to spend money first before our HMO helps us out. Thank God we have a rainy day fund.
If we suddenly lose our job, we would still need to pay our bills and look for another job. Instead of borrowing money from long-lost relatives who are trying to avoid us, we rely on our rainy day fund instead.
3. It's personal
There's really no exact figure as to how much our rainy day fund should be. What we have, instead, is a healthy range: we need to save up the equivalent of 3 to 6 months' expenses for an unforeseen event.
What's right for us depends on our personal financial situation. If you're still a 20-something or a 30-something, it's highly suggested that you:
- Save up 3 months' worth of expenses first
- Start getting life insurance for estate planning and income protection
- Start investing
- Continue saving up 6 months' worth of expenses (or more!)
Naturally, if we have more bills, we need more money saved up for our emergency fund.
4. Think of our emergency fund as our present self's gift to our future self
Hey, don't think that our rainy day fund is a nuisance. It's not a super hard sacrifice.
It's simply paying ourselves first and giving our older self a lovely gift. I know I felt this way when I was sent to the emergency room with only PhilHealth as my health insurance!
[Note: PhilHealth is for hospital confinement only, so if we're treated in the ER, we're still supposed to pay the hospital in full even though they only gave us pain medication.)
5. Accessibility is our priority
Let's not stress ourselves too much with finding out which savings vehicle we should put our rainy day fund into. As long as it is accessible so that we can withdraw it in case of emergency, the interest rate doesn't really matter that much anyway.
An online savings account or an ATM savings account will do fine.
If we're too worried about the interest rates, then we can put half of our emergency money in a time deposit account that rolls over monthly.
6. Small and steady, now
One-time big-time? Bad idea.
It's like going on a diet — do a crash diet and we'll lose weight rapidly. Start eating badly again and we'll gain twice as much weight.
Instead, start small. If we can't afford to save 10% of our income for emergencies, why don't we start with at least 5% first? We can increase the amount over time.
7. Something is better than nothing
Going by the above example, if our monthly income is P20,000 and we can only save 5% of it first, then we're saving P1,000 per month.
If we manage to save up for one year, then we will have P12,000.
If our target amount is P60,000 and we only have P12,000 for now, don't get discouraged!
Remember to acknowledge progress, not perfection. P12,000 is still a substantial amount. If we encounter an emergency, then we still have a rainy day fund to pull us through.
I don't know about you but I'd rather have P12,000 in my bank account rather than none at all.
8. Automation can help make the process easier [and less painful!]
If we haven't acknowledged the fact that an emergency fund is our gift to ourselves, then making it automated is suggested. Ask your bank about automatic deduction from your monthly payroll into a save-up account that also doubles as life insurance
Make everything as convenient as possible so that we won't have reason to procrastinate.
9. Spoil yourself with peace of mind
Instead of spoiling ourselves by going to the spa and putting on expensive facial creams that don't really do much for our skin, let us spoil ourselves with a rainy day fund. It's like buying ourselves peace of mind.
If we're able to save 6 months' worth of expenses, that's 6 months' worth of less stress.
10. Start now
If we don't start now, then when?
When we're already earning so much more? I'm willing to bet we're going to spend so much more, either. Now's the time to start saving!
When we don't have a lot of expenses? Our bills are never going away unless we decide to be homeless, phone-less and wifi-less. Our expenses will still be there today and tomorrow. Start saving now.
When we've already done enough research? Let's multiply our monthly expenses 6 times. This is the amount we should be saving up! What are we waiting for? We should start building our rainy day fund now.
Our emergencies aren't going to wait for us. We're not best friends with them. They're going to hit us when we least expect it.
Isn't it better for us to be prepared when that time happens, then? - Rappler.com
Woman with colorful umbrella photo from Shutterstock
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- 5 money mistakes 20-somethings should avoid
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Lianne Martha Laroya is the founder of The Wise Living, a website dedicated to educating young adults on money management and early investment without boring them to tears. She is also the author of "12-Step Guide to be a 20-SOMETHING MILLIONAIRE" now available for free.