(Cool piggy bank. File photo from Agence France-Presse)
9 weeks: the average Filipino’s rainy-day fund
Saving money, Financial Planning
I have a friend who loves rainy days. She loves the sound of raindrops on her car, her windowpanes, the street – just about everything! I too find the rain very “senti”, uber-relaxing and it puts me in “emote mode” hehe. Helps me to put words on paper too.
But rainy days of the financial kind, that’s another thing. I can’t imagine anyone liking them. They strike suddenly and ruthlessly – and you don’t know long they will last.
Remember the recent study by Citibank that revealed Filipinos have low financial IQ? There’s another revelation in that survey that says average middle-class Filipinos have on the average nine weeks’ worthy of rainy-day funds.
On the one hand, I found it quite comforting that average, middle class Filipinos have a rainy-day fund at all! On the other hand, that fund won’t see us through those dark and depressing days.
As you all know, the prescribed amount is three to six months worth of living expenses. The baseline is not your salary or earnings from business, but living expenses. Here’s a thought: do you know how much you spend monthly? If all you have is a vague figure, get your pen and start jotting down monthly expenses.
I have previously written that putting your money in mutual funds, bonds or equities is foolish if you don’t have an emergency fund first. You don’t want to be caught needing cash when the market’s down!
Our personal finance feature for today from Citibank says:
Nine weeks. That may not be enough to get back on one’s feet. Thus, there is a need for an emergency fund that should cover anywhere from three months’ to six months’ worth of expenses. This will help you tide over the tough times until you get back on track. Besides, borrowing money to cover emergencies will cost you more.
Should you save for three months’ or six months’ worth of expenses? Some financial experts advise only three months’ worth of expenses in the emergency fund if you are employed. If you are self-employed, they say you’ll need six months’ worth of expenses.
But of course, the more you save, the better. You do not know when bad things may happen and for how long they will last. Save at least six months’ worth of your expenses — living expenses, bills, saving for a child’s education, and the like.
As to your big challenge: How to save for an emergency fund when there doesn’t seem to be enough funds in the first place.
Here are some tips:
1. Stick to your goal. If you say to yourself that you will start an emergency fund, be committed to do all it takes to fulfill that goal.
2. Review your obligations. You mentioned that you have “so many other obligations.” Study your list and find an expense you can cut down. For example, if you haven’t been going to the gym at least three times a week, then you may be better off canceling your gym membership. The savings you will get from canceling the monthly dues can be channeled to your emergency fund. You can find another exercise alternative that won’t cost you money, such as walking in the park.
3. Before spending anything for the month, save first. Once you get your paycheck, set aside some money for your emergency fund. Start with at least 10 percent, and increase it as you free up more obligations. Making saving a priority will be beneficial for your financial future.
4. Open a separate account for your emergency fund. This will help you to avoid dipping into your emergency fund for living expenses.
5. If you have a sideline income or receive a windfall (example: bonus or prize money from a contest), use this to pay off your debts, then put the rest in your emergency fund.
6. Cut down on expenses that you can do without. These may include weekly trips to an expensive coffee shop, or going for designer clothes. Just think: if your family is in need or has an emergency, you wouldn’t even think of these things. But you will rack your brains thinking of how to meet the family emergency with your meager funds. Thus, prioritize the emergency fund.
If you or anyone you know is struggling to set up an emergency fund, how’s this for motivation. Forget the three to six months rule of thumb for the moment. Just start saving any amount upwards of P1,000 this payday and move on from there. Start with small steps and give yourself a pat in the back afterwards. Consistency is what matters most. You’ll find it easier as you go along.
Good luck!
March 2nd, 2008 at 4:20 pm
I’ve always been an avid preacher of emergency funds. It’s hard to convince most Filipinos to build one up! It’s strange that it’s difficult convincing most people because it’s a very logical step and personally it has saved me from financial trouble so many times.
Last year, my emergency fund was half-gone because of unexpected medical expenses. I’m building it up again and have 4 month’s living expenses saved up, although my goal is for 1 year.
I also keep my emergency fund separate from my retirement savings. I remember that one of the bank tellers laughed at me for saving up for retirement because I’m only 24. She can laugh now, but I’ll be the one living worry-free for the rest of my days.
March 1st, 2008 at 12:03 am
salve, what i suggested to BPI was not necessarily a passbook type S/A. it can simply be another BPI direct online account. what they (BPI) could easily do is enable the account holder who has online access to easily setup an online smart-save account wherein they can set everything up in terms of funding account, amount and frequency of transfer. if the account holder needs to take money off that smart-save account, then he has to go to the branch where he/she originally opened an account or to BPI head office in Makati and present the same IDs as on his record
February 29th, 2008 at 3:29 pm
Salve, banks will not normally lend to startups. The business must be in operations and has positive cash flows to qualify for loan. For startups, you have to rely on your own savings and those of your family and friends (angel investors) assuming you can convince them to invest. (Of all people, my biyenan entrusted me her money. I couldn’t convince my wife, she has her own business.) :-)Venture capitalists also require counterpart equity from the entrepreneur. Capital formation is the start of entrepreneurship.
February 29th, 2008 at 2:51 pm
femaad, doctors are not the only ones…many professionals also exhibit similar disregard for financial health because they feel that they can always earn big money. but we all know life is not as predictable as people often think!
you know i just realized that reading and learning is one thing, actually doing what you learn is another. if you guys are not doing your stuff at your end, everything in MoneySmarts will be useless! hehe.
February 29th, 2008 at 2:47 pm
C_A, I just heard from BPI yesterday that they no longer offer passbook-only accounts. All their new accounts have ATM. But I think some banks still offer passbook-only accounts and they do allow automatic fund transfer, the date and volume is set by the depositor. you know, automated savings is by far the simplest and most effective tip i have seen on how to increase savings. it removes the pain from having to set aside money regularly.