Investing for the future is good. It is even recommended for almost everybody as this would enable them to reach their life goals faster and, given enough time, with lower cash out as investing makes money work for them.
But there are time when investing is not recommended, most especially if a person hasn’t established an emergency fund yet. Having an emergency fund is like having a buffer fund during times of unforeseen expenses.
It is like having a financial spare tire that you can use should there be surprising events that require funding like house repairs, a simple school requirement of your child or worse, being laid off from your job.
In the past, we have used our family’s emergency fund to repair our car’s aircon when it suddenly did not work; we also used it to buy our daily food as well as medicines when my daughter was in the hospital; and it was very much useful when a relative needed some money and we have to help them.
These things at best cannot be programmed nor planned, so emergency funds be placed in an instrument that is accessible and can be withdrawn conveniently. Having 3 to 6 months’ worth of your expenses is ideal, while having a year’s worth would be very much recommended, most especially for entrepreneurs and people transitioning to be one.
A combination of an ATM account, money market fund or even a time deposit account is recommended. Putting everything in an ATM would not be optimal as you get only a very low interest rate.
Similarly, putting everything in a money market fund can make you illiquid—as investors get their withdrawal from a money market fund usually the day after. Think of the scenario should you needed cash in the middle of a long weekend—how can you have the money if you cannot withdraw from the bank?
That’s why a combination would be best—some cash in an ATM account that you can withdraw at anytime, and some in money market fund to have a higher rate of return. For starters, you can have 1-2 months’ worth of expenses in an ATM account and the rest in a money market fund. Of course, you can fine tune this approach as you get more hold on your expenses.
Each person, however, has his or her own unique financial goals and responsibilities and as such, building an emergency fund should be customized and fit towards these. Nonetheless, having an Emergency fund is a bedrock for all who wants to have a secure financial life as we cannot foresee–and plan–for everything.
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About the author
Rienzie Biolena, RFP® is one of the pioneering Registered Financial Planners in the Philippines. Apart from this profession, he is also a writer, speaker, and trainer on financial literacy. He is currently the CEO of Wealth Arki, Inc.