Emergency Fund Or Cushion Money: Which Should You Have? A Financial Coach Points Out The Difference
You have to be ready for unexpected circumstances.
The COVID-19 pandemic, the lockdowns, and their effects on our livelihood and overall health are prime examples of unexpected circumstances. Because of these, millions of families have experienced health and financial emergencies, resulting in debts as a last resort to survive. As they are unexpected, many won’t know what hit them right away and it will take a while before they could get back on their feet. You can, however, ensure that financial shocks would not set you back by building your own emergency fund.
What is an emergency fund and why do we need it?
According to financial coach Chai Gamo, an emergency fund is the “money that you set aside for unexpected and unwanted circumstances you might need to spend for.” Some examples include major home and car repairs, damages caused by calamities, loss of job, etc.
Building one is immensely important because as we all know, life is full of uncertainties. “No matter how much we try to avoid mishaps or unwanted circumstances, at the end of the day we are not in control of everything,” she says. “Having an emergency fund is similar to having a safety net -- in case something happens to us, at least we don’t have to fall into debt. In a way, we are able to create a sense of financial security.”
The difference between an emergency fund and a cash cushion
While an emergency fund is reserved for major emergency situations, a cash cushion is for minor unexpected circumstances, such as a sudden increase in electricity bills, and the like.
Coach Chai says, “For freelancers, these are the ‘low seasons’ wherein you don’t earn as much income. Cash cushion, or what I call ‘buffer money,’ can be used to cover for what you were supposed to but didn’t earn in a particular month.”
How can you start building your emergency fund?
Typically, an emergency fund amounts to 3 to 6 months’ worth of expenses. For example, if your total monthly bill (all expenses included) is Php 20,000, then your emergency fund needs to be around Php 60,000 to Php 120,000.
The 3- to 6-month rule of thumb is so that you have protection for a long period of time if you do experience a difficult financial scenario, such as a job loss. If you do lose your job, you have ample time to look for another without worrying about your current month’s expenses.
Candice, 26, and the breadwinner of her family, had trouble building her emergency fund because of her low monthly income. “Being a breadwinner with relatively low income is difficult. I have to list down all expenses, hanggang sa katiting na piso, nililista ko,” she shares. “But I completed my emergency fund this year, and I’m proud of myself.”
Coach Chai says that if you are the breadwinner of your family, it is still possible to build your emergency fund! “Start little by little,” she recommends. “Create a target amount and date of completion. Aim to put your extra money in your emergency fund. You can also try doing the different money challenges (P50 challenge or 365 days peso challenge, etc), just so you would feel more motivated to do it.”
Candice did something similar. “Bukod sa talagang nagtipid kaming buong pamilya, walang online shopping budol, kaunti lang ang luho. Sinigurado ko na may Php 1,000 akong maitatago every week.”
Candice’s Php 1,000 weekly savings helped her complete their family’s emergency fund after two years. “Ang tagal ko na nagta-trabaho, and it took me two years to complete our emergency fund. Medyo natagalan pero ang mahalaga, makakahinga na ako nang maluwag,” she shares.
As for Janna, she built her emergency fund by participating in the “50-Peso Money Challenge” wherein she would keep all of her fifty-peso bills in one place, and make sure that they will go straight to her personal savings account.
“I have an emergency fund for personal emergencies, because I don’t want to rely too much on my parents,” shares the 24-year-old. “I make sure that all my 50 peso bills go to my emergency fund. I completed my EF in just 8 months because of this challenge.”
However, Janna’s technique cannot promise you an exact amount to be saved for a certain month. “Sometimes, I have bigger or smaller savings than the previous month, but that’s because the 50-peso challenge doesn’t promise you any exact amount. Basta ang goal is, kapag puro 50 peso bills yung nasukli sa’yo, lahat yun i-se-save mo. It depends on the circumstance.”
Whether you should keep your emergency fund in a bank account or physical cash is entirely up to you, says Coach Chai. “The idea is to keep your emergency fund as liquid or accessible as possible. Either of the two is okay. I think what’s more important is that you discipline yourself to keep your emergency fund untouched for expenses that are not really considered as an emergency.”