Life is full of surprises!
Be it a good surprise which I think everybody enjoys or a bad surprise which most of us tend to avoid. But how does one prepare from negative financial surprises?
Today we are going to discuss how we can benefit from an emergency fund.
What is an Emergency Fund?
Basically, an Emergency Fund is a monetary insurance that will aid a person’s needs in an emergency basis.
The purpose of the fund is to improve financial security by creating a fund that can be used to meet emergency expense as well as reduce the need to use high interest debt, such as credit cards, as a last resort. Investopedia©
What are these ‘Emergencies’?
Medical Emergency
Property Loss
House Repair
Unemployment
Untimely Death
and many others…
How to build an Emergency Fund?
Most Financial Planners suggest saving at least of 10% of income and placing it to a separate account for a good 3 to 6 months’ worth of living expenses.
I personally don’t think it will suffice.
Assuming salary and living expenses is constant: It will take him 2 and 1/2 years just to come up with 3 months’ worth of salary. And if he does this for 40 long years he will only come up with 4 years’ worth of emergency fund.
And when Critical Illness, such as cancer, strikes!
His 40-year-old hard-earned savings will be wipeout in less than three months.
This is why we need to leverage our ‘Emergency Fund’.
How can we do that?
Simple, we leverage using insurance protection.
Say for example, A Sun Life Critical Illness Rider offers you to pay 100.00*pesos monthly for a total coverage of 250,000.00 pesos. Even if you pay for 40 years, summing it to 48,000.00* pesos, it is way too cheap compared to the 250,000 coverage.
Not bad.
If it turns out you were not diagnose any of those terminal illnesses then that is better! I would gladly pay not to get ill. We are not even sure if the insurance provided is enough to cover the medication.
So what emergencies are insurable?
Property? Yes.
House? Yes.
Health? Yes, but not all.
Life? YES!
Unemployment? No.
So let’s focus on the emergency that has the highest probability, unemployment.
How long did you way to find your previous job?
According to UEMPMEAN the average unemployment duration as of November 2013 is 37.2 weeks.
So setting a fund worth 3 months of living expenses is a good insurance just in case you will lose your job and will take you around 3 months to find another one with enough income to beat your expenses.
Next is health-related insurance.
There are many health insurances and Health Maintenance Organizations (HMO) out there. But they do not shoulder all the patients’ expenses.
So it would also be a smart move to set a fund for that.
Honestly, it is hard to tell on how much really is needed to safeguard such misfortune. However, we need to prepare nonetheless.
Probably the best thing to do is trace your family history and check their cause of death. If they died with genetic diseases then possibly you will have one too.
So list all those probable illness with respect their corresponding medical expenses less the coverage you have with your health insurance.
Keep in mind that some hospitals with higher room rate, has higher cost of service; it is sometimes called “socialized pricing”.
Also, expand your network and befriend a few doctors who specialize in this field. Who knows? They might give you a discount to some fees.
And if the odds is in your favor, no terminal illness whatsoever, you can still use your network to help those in need through recommendation.
To sum it all up, use insurance to leverage your emergency fund. Allocate 30% of your income for financial goals until you reach your target fund, say 3 months for unemployment and some extra cash for other things.
P.S.: If 30% is too much to put into then that is a good thing, find legitimate ways to increase your income. If not then start by little and gradually increase your savings until it hurts.
