You’ve finally decided to take charge of your financial life. There’s no more turning back. You will write down your financial goals and objectives in clear and achievable format.
You list down the possible avenues where to invest your money – stocks, bonds, mutual funds, Treasury bills, real estate, etc. The opportunities seem to be unlimited.
After months of saving some cash to reach your financial goal, you’re now excited to call your financial advisor on which hot stocks to buy. You can now clearly see yourself in the next 10 years – a beach bum sipping piña colada in Boracay while waiting for your dividend checks and capital gains.
Everything is now auto pilot. You don’t have to work so hard. You can virtually do everything you want.
But wait, before you get excited and call your financial advisor, there’s one more thing that you need to consider. (Okay, I’m spoiling the party.)
You need to start building an emergency fund.
What’s an emergency fund? An emergency fund is money set aside for cases of emergency like job loss, unexpected house repairs and maintenance or hospital bills. The requirement is that the fund must be readily available. This means that the money may be in a savings account or bills that can be easily terminated without friction costs.
Well, how do you start an emergency fund? I suggest the following practical advice:
1. Know how much you can set aside cash for a month. The first step really is to know how much are you really spending a month against how much are you earning. The excess would be residual income or deficit. If you have a deficit, try looking at expenses you can avoid so you can free up cash for an emergency fund.
2. Multiply the figure in #1 by 6 months. Many personal finance experts are suggesting that the emergency fund should be worth 6 months of expenses. However, this depends on how comfortable would you feel. The rule to emergency fund is the bigger is always better. Times are uncertain, you don’t want to lose sleep finding where to find money if the next recession comes.
3. Open a bank account for this purpose. While there are many short term investments where you can place your fund, I suggest that a savings account would be fine. You don’t want to earn a few percentage points on your money but have the hassle of withdrawing your funds when a real emergency happens.
4. Have the discipline to use the fund for emergency only. This is the most important rule here. Use the fund for emergency purposes only. Of course, you have to define emergency first. But I’m sure it’s not when your favorite retail shop announces a 50% price cut.
With an emergency fund, you won’t worry about your investments. You don’t need to sell a dividend paying stock, or borrow money from a friend just to foot an emergency bill.
You can walk freely in the white shores of Boracay without worrying about when the next recession will be. And of course, with piña colada in one hand.
For those who are keen on starting their Financial Life, this article can be helpful: http://bit.ly/gFSvV2