By definition, An emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major expense.
So this only means that it should be a MUST for every working citizen (breadwinner or supporter). Anyway, here are some basic steps on building your emergency fund.
1. Determine your monthly budget at its most basic.
You need to calculate the total amount of your basic expenses. This includes utility bills (the most basic would be electricity and water), food for the table (excluding eat-outs at the malls and/or restaurants), your kids' basic expenses (schooling). Sale at the Malls are NOT included in your emergency fund.
2. Determine the amount you need to build your emergency fund.
Once you determine your basic monthly cost (sale is not included), you need to know how much would you need (for how long). Most local (and foreign) blogs would advise to have at least 3 months of your basic expenses. Some would say at least 6 months worth of your basic expenses. But for me, I'd go the distance and recommend 9 to 12 months worth of your basic expenses. Sounds insane right? But for me, I'd rather be safe than sorry,
3. Determine if you need a buffer for your emergency fund.
While you were able to determine your basic budget for each month, You also need to consider the possibilities of encountering any unnecessary incidents. These incidents may affect your budget once it happens. A few examples would be expenses if your car broke down or if someone in your family got sick and hospitalized. If you decide to save 9 to 12 months worth of your basic expenses, a 10-20% buffer will do. If your saving for 6 months, a 20-30% buffer will do. And if your saving for only 3 months, a 50% buffer should do. The bigger your emergency fund, the smaller the buffer. Let me know in the comment section if you have other ideas on building your emergency fund buffer.
4. Determine the amount of time that you need to build your emergency fund.
Building an emergency fund takes time. It may take a year to a couple of years depending on your strategy. Patience is the key factor here because the bigger your targeted emergency fund, the longer it may take for you to accomplish it. The good thing is you don't need to be in a hurry saving up for it especially if you are still able and working. As I posted this, I'm still working on my emergency fund. =)
5. Determine the possible source of your emergency fund.
Now that you know your basic monthly budget and how much would you need for a certain period of time, you need to know where would you fund your emergency fund until it hits your target goal. The first thing that may come to your mind is to fund it from your paycheck. You may allot 5-20% depending on your objectives and targets. If you want to speed-up your funding, try to freelance your work or do sell something that people need. That way you'd be able to reach your target at the soonest time possible.
I hope I was able to give you some basic guidelines on building your emergency fund. But were not yet on the technical aspect of it (this will be on another post). If you have other ideas on building-up your emergency fund, please feel free to comment below. =)
