How Much Emergency Fund Should You Be Saving?

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Establishing an emergency fund is the first step towards building your savings. But how much money should you be stashing away? And what happens if you don’t have that much, to begin with?

An emergency fund cover expenses like unexpected medical costs, car repairs, or job loss—anything that will force you to spend more than you can afford. It’s not meant as a piggy bank where you stash every cent of savings until an opportunity presents itself for you to splurge on something unnecessary.

You already know you should have one. But how much should you aim for?

You’ll often hear from finance experts that you should set aside 3 to 6 months of essential expenses in your emergency fund. But our incomes and lifestyles vary.

In this article, we’ll discuss essential considerations in determining the size of your emergency fund, cover the reasons you should have one, and share our emergency fund calculator to help you find out the amount you need to save.

What is the right emergency fund amount?

The rule of thumb is to save 3-6 months’ worth of living expenses. That way, it’ll cover you if something untoward happens and you find yourself without a job or a steady source of income. Of course, the more money you can stash away in your emergency fund, the better—especially if you have dependents.

The key here is that an emergency fund shouldn’t be just another savings account where you add every extra cent that comes your way until it gets big enough for your liking. When you’re struggling to make ends meet, it’s probably not the best time to be thinking about building your savings.

You should start saving for an emergency fund when you’re in an excellent financial position. For example, after you’ve paid off all your debts and you know exactly how much money is coming in vs. going out every month. You can then consider transferring some of that cash into a separate account earmarked only for emergencies. 

Pre-pandemic information from the Philippine Statistics Authority states that the unemployment rate in the Philippines in July 2021 was estimated at 6.9 percent. It is the lowest since the pandemic started in April 2020.

So it’s sensible to save an emergency fund amount that protects at least three months of living expenses. But should you have more?

A 3-month emergency fund as your baseline

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The bare minimum would still be three months’ worth of living expenses. If you have job security or a regular source of income, then this is the safest option if something unexpected happens. Your housing/rent, utility bills, food, and automobile payments should all be included here. Of course, if you have dependents, then you can share three months’ worth of expenses.

With a 3-month emergency fund, it’s always advisable to keep your full-time job and hope for the best. You can apply for unemployment benefits until you find another job. And if you absolutely must dip into your savings before finding employment, make sure it won’t jeopardize your financial security.

For example, if you need P20,500 to cover your monthly overhead costs, you should have a P61, 500 emergency fund. Note that items such as eating out and entertainment are not included since they would be the first things you’d cut from your budget if necessary.

But a 6-month fund is Ideal

If your employment is in an unpredictable industry or finding a more difficult job, you should put up six months of living expenses in an emergency fund. For example, this would be relevant if your source of income isn’t secure because it may not be enough if you lose your job.

Or, say, for example, if your work hours are slightly unpredictable every month, then it’s not good to tie up all of your savings in an emergency fund since there’s a chance that some months you’ll need more than three months’ worth of living expenses.

You can compensate for this by building up your savings gradually over time. If you’re confident enough that the next few years of employment will be smooth sailing, then it might be okay to start with just three months’ worth of living expenses as your emergency fund. That amount should suffice until you get closer to having six months’ worth saved away—which is the ideal goal anyway.

Having a larger cushion is preferable when you have dependents or are unsure if you’ll be able to recoup lost wages within three months.

A 12-month fund is Challenging, but worth it

If your earnings are low, it may be challenging to build a 12-month emergency fund. But if you’re part of a double-income household or are a high earner, consider one. Knowing that you have enough cash set aside can provide comfort—especially when your employment is uncertain, and you have a household to care for.

What are the top reasons to have an emergency fund?

  • Emergencies can happen at any time and they might require immediate spending (e.g., car repairs, medical bills).
  • You may not be able to rely on credit when unexpected events occur.
  • An emergency fund allows you to take care of expenses when your income is temporarily interrupted (e.g., laid off from work, unable to find employment after job loss).
  • Having access to cash makes meeting everyday expenses easier during periods of low income or high expense (e.g., children go back to school; heating increase due to weather conditions; etc.).
  • Having an emergency fund can help reduce the amount of debt you carry.

Emergency fund calculator Philippines

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The spreadsheet below depicts ProfitTakeoff’s simple emergency fund calculator. It’s easy to use. Start by entering each of your essential monthly expenses on the left-hand side. The cells you can change are all highlighted in pink.

You can change these expenses as often as you like, and the blue highlight will show you exactly how much money you’ll need to save to meet your emergency fund goal.

We’ve already done the math to calculate how much you should put aside. The calculators provides you with the amounts required for a three-month, six-month, and one-year fund.

If you’ve already started saving, place the amount you have on the “basic monthly expenses” cell.

You can use this link to open our Emergency Fund Calculator.

Where should you keep your emergency fund?

Your emergency fund must be readily accessible. As a result, liquidity and accessibility are two of the most important things to consider while seeking for a location to keep your emergency funds. In that sense, an online high-yield savings account may be an ideal storage space for your money.

Please keep in mind that if you open a high-yield savings account, you don’t need to close your existing bank account. You may electronically deposit funds into your new account using your present bank account.

Because online banks do not have to cover the same overhead expenses as brick-and-mortar institutions, they can deliver a higher APY. Additionally, because you may make limitless deposits and use your money at the same rate as a typical savings account. Some high-yield banks in the Philippines are Tonik, ING and CIMB.

Is there a right or wrong way to save?

There is no right or wrong way to save, but you should do what feels comfortable for you. Make sure that you do something with your money every month, so it doesn’t just sit in your bank account and collect dust. Whether investing it, saving it up for something later on, or spending responsibly—make sure that it’s not just sitting there!

Final word

Was There a Number That Was Better Than the Others?

There is no magic number or percentage to save in an emergency fund. It depends on your circumstances and your plan for the money you have saved.

If you have a history of not saving, start small and increase it as you get the opportunity.

If you have been saving for a while but find it difficult, look at your spending habits and see if anything can be reduced so more money is protected. Reviewing what you spend regularly will help to form a clearer picture of where your money goes.

You may also want to change your savings account. Some savings accounts even allow direct debits from bank accounts which can make life easier. Banks will provide current interest rates online or over the phone.

Sometimes life presents financial challenges, and you may find yourself needing to dip into your savings.

Don’t worry. What matters is that you begin. The key to achieving your goal is to save money on a regular basis. Our Emergency Fund Calculator may help you figure out how much cash you’ll need in an emergency.

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