Translate

Wednesday, July 20, 2016

7 PILLARS OF BUILDING AN EMERGENCY FUND


Do you consider losing your phone an emergency situation? How about finding a one-peso deal online from CEBU PACIFIC? OR maybe, a friend is asking you to hang out over happy hour? It sounds so irresistible, you conform even if it means spending the last food money you have for the week. More likely, if you would answer yes to these, a reassessment of your understanding of an emergent situation is needed.

The big question now is, what should be treated as an “emergency”? Let's consider only three:

1. A life threatening situation for you and your family
Example: sudden hospitalisation, dealing with complications of chronic illness; force majeure; war

2. If you are cut off of your main source of income
Example: you got laid off that resulted being jobless, most especially if you're the family's sole bread winner; force majeure

3. Death
Death of the bread winner in the house may leave a family in an emergency because there's no source of income. Funeral services had to be done and, most of the time, it's the least included in one's personal budget. Death is inevitable, yes, but it comes with an unexpected cost of funerals.

So, anything that doesn't fall under these categories, more or less, is NOT an emergency. Although, any situation which could lead to it may be reconsidered. Say, if your car is your only means of income like UBER, car rental services or you are a transporter by the day, obviously, it's your main source of income. Therefore, this falls under the second category.

According to Floi Wycoco, founder and Chief Executive Officer (CEO) of The Global Filipino Investors, a person’s emergency fund is ideally a total of 3 to 6 months’ salary. The basis of this would be the number of months you can be covered without compromise to your usual lifestyle even if you don’t have a job before you land the next one. This is also put together to cover up for any expenses after whichever emergent situation may lead to. Depending on the number of months you’re going to decide on, it still takes a lot of effort to build that safety net that will catch you.      

Here are the 7 pillars that could help you build a sturdy emergency fund:

1.   DISCIPLINE

Recognizing emergency situations need a great amount of discipline. We have defined what it is earlier. Simply put, establish your definition by remembering the three things that should be present: the sick, the dying and the dead. So that you won’t be misled with what you'll consider a priority.

Since emergency fund is for emergency purposes, it should be liquid. Meaning, it should be available and accessible at all times. Wherever and however you keep it safe, you should have a full access to it anytime. And here’s how it becomes difficult. You may always be tempted to dig into it.

Don’t underestimate the struggle behind resisting most especially when you become emotional on something like the need to reward yourself every payday. When you go over your budget to buy what you think you deserve, then your emergency fund may suffer.

A friendly advice from Edward Lee, CEO of COL Financial goes, “Develop the habit of saving up a portion of your salary with the aid of a budget formula, then find the discipline to stick to it. Ideally, it’s 10-20% of your income”.





A sample budget plan, by JP Adena of Spearhead Mission, called “IsaveIspend” encouraged a lot of Filipino overseas workers in Hong Kong not to fall in debt. With an advocacy for a financially literate community, he allots ‘Happy Fund’ as the the number one need to be met. And this should never be reprimanded in any way. Why? To keep you motivated to follow this budget plan the next month, and the next month, and the next month.

Reminder: The funds from the right column may fill up percentages on the left but strictly, the funds from the left should never be used to pay the ones on the right. Also, the funds on the left side should be kept as is except if the emergency fund had been filled up already.

A good help to your own discipline is to allot a different percentage of your salary for your ‘happy fund’.

2. EDUCATION


“Investing in yourself is the best thing you can do.”
 – Warren Buffet

It is liberating when you learn about something you were curious about for a long time. It's even empowering when you know something so well that you get to teach it. It doesn't matter if you just started learning about financial education a year ago or for then years already. The important thing is you're establishing yourself with much deeper sense for whatever may happen in the future. Security after all is the best pillow at night. It is important to know where you invest your hard earned money into.

Friendly advice: Take advantage of the platforms available online that offer and assist you to financial education. Some people have a concept that money is evil.  www.trulyrichclub.com says otherwise as the founder of this club is a pastor gone financial advisor. Check out what he has to offer for you. Start getting familiar with the 3 Basic Laws of Money by reading, “The Rich Man in Babylon”. Robert Kiyosaki’s book, “Rich Dad, Poor Dad” is a true eye opener to the concept of financial freedom. And www.investopedia.com is another good source of non-biased information when it comes to handling your finances. Motley Fool owns another website that gives education and advice in terms of stocks to put up with and lose vs. time.

3. PERSERVERANCE

Any good investment usually takes time to bring back profit. Don’t expect that
you save now and then you reap money to spend it tomorrow. It doesn’t work that way. It means you have to work doubly hard over time.

If you persevere in everything you do today, if you persevere to be the better version of you each time, you’ll be able to get rid of nasty habits and make way for good ones, you’ll be able to control your emotions and you’ll be able to focus on your goals. You may be led to endless opportunities because you will strive to learn every day.

4. COMMITMENT

Good habits emerge from how committed a person is. And a commitment’s backbone is a
person’s biggest WHY. If you can’t figure that out just yet, be reminded that your emergency fund isn’t for anybody else but you and your family. That’s enough reason to commit. If you’re single, commit to living the dream you’ve always wanted.

5. HONESTY/INTEGRITY

These two work hand-in-hand as you fill up your emergency fund. If you have a second job to have an additional income but you call in sick to keep up with it, where’s your integrity? If you collect a dollar a day from random friends, (which is an annoying attitude of some Filipinos), just so for additional change to your emergency fund, that’s being dishonest. Just say no to unnecessary spending habits.

If you would like to earn passive income, there’s a lot of ways but of course, we need to go back to educating yourself by learning about investing on assets whose return of investment (ROI) is good (e.g. businesses, properties, gold/silver coins).

INVESTOPEDIA.COM:
                 
The RETURN OF INVESTMENT (ROI) FORMULA:
                 
ROI = (Gain from investment - Cost of Investment)/Gain from investment

where:
“GAIN FROM INVESTMENT” refers to the proceeds obtained from the sale of the investment of interest. Because ROI is measured as a percentage, it can be easily compared with returns from other investments, allowing one to measure a variety of types of investments against one another.

6. DETERMINATION

As an adult, you set priorities. You weigh consequences of every decision you make. And as you become aware of what works for you or not, be determined to stand by something that will do you good in the end. Have the determination to step up and be responsible in choosing what fits your budget. Say no to unnecessary spending habits.

7. PATIENCE

Once you are able to reach the planned amount for your emergency fund, the excess funds can be invested for further growth of your capital. Let me suggest for you to invest it into something that will take advantage of the compounding interest and beat inflation. For example, investing on mutual funds, stocks and bonds that may allow your money to earn 5% beating inflation. Here in Hong Kong, the inflation rate is at 3% as of the moment. It means, your money had earned 2% overtime if you are assured of a 5% ROI thru a lifetime savings plan.

Inflation, according to www.investopedia.com, is the rate at which general prices of services and goods is rising, and consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation in order to keep the economy running smoothly. This may be shocking to understand that the amount of goods your HK$500 can buy is not the same amount of goods you can buy 5 years after.

Friendly advice: Learn the beauty of delayed gratification. Be patient by sticking to your budget plan. If there’s an ongoing sale in the mall and you feel that your happy fund isn’t enough to buy everything you like, be patient. And focus on the bigger reward, a secure future.

Having an established emergency fund is the first step into attaining financial freedom. So many how-to-budget ideas are out there, but whatever you may choose to adopt, it’s important to know how to live to it. No matter how big a goal may be, foundation is what’s given most of the effort, time and energy. With these 7 pillars, you can never go astray.

Related posts:
1. CASHFLOW - the board game that would make you realise that having a job is the most boring way of earning an income.
2. SUMMER 2016 PLAYLIST - Want to get pumped up every morning to wake up driven and motivated? Download this in your playlist!
3. HOW A YOUNG GIRL'S VALEDICTORIAN SPEECH APPLIES ISAAC NEWTON'S LAW OF MOTION TO LIFE - My godfather's daughter wrote this speech and it is astounding!

No comments: