We've all experienced this and it usually comes at the wrong time: the time you'll need to cash out a big amount of money for unforeseen events.
Have the following scenarios happened to you in the past or are susceptible to come any time?
- your car breaks down or needs a body repair because a careless bus driver hit you.
- your family is about to get bigger. It's a happy news :-) but do you have the means to pay for the hospital bill?
- you suffer from sickness that won't allow you to work for some time. Can you still pay the hospital bill and can you feed yourself and your family while recovering?
- a family member is sick and needs your help.
- you lost your job. Is it going to be fast to find an other one?
- and many more possibilities...
To cover those events, we advise you to have an emergency fund.
The emergency fund must ideally cover a period of 6 months of your salary. It must be easy to withdraw and immediately available if needed.
The only place where you can place your emergency fund is in a savings account in a bank for the following reasons:
1. It is easy to withdraw.
2. You can withdraw it at any time.
3. It's still better to place your money in your bank than in your house because someone can break-in your house or a fire can burn your money away. Besides, the bank will give you (little) interest...
We advise you to put your money in a well known bank and make sure your account doesn't exceed the 500,000 pesos limit of the PDIC insurance in case the bank goes bankrupt.
The only downside is that the interest rate is low. Around 1 to 2 % which is below the inflation. Meaning that the value of your money stored in the bank will decrease each year that passes. That's the reason why you shouldn't put too much money in your emergency fund. Just place enough to cover your expenses and little more in case you end up jobless.
Every month, use a fraction of your savings in order to fund your emergency account.
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