Building an Emergency Fund: Why It’s Important and How To Start Saving Even on a Limited Income

Building an emergency fund is a fundamental part of better financial planning. This can help you feel more in control of your finances and reduce stress related to uncertainty. It provides a sense of security and gives you the flexibility to manage your finances more effectively. And this is why, it is so important to have an emergency fund even if you’re on a limited income.

In this post, let me show you:

• How important an emergency fund is
• How much should you save
• How to start saving even on a limited income, and lastly
• My tips for staying motivated and committed to building and maintaining your emergency fund

Why is an emergency fund important?

1. Provides a safety net during unexpected situations. During income disruption, an emergency fund can provide a safety net during unexpected situations by giving you financial resources. Let’s say you lost your job, emergency funds can cover your expenses until you find a new one. At the same time, it decreases the stress that comes with losing your main source of income. Or if there’s a family medical emergency, an emergency fund can cover the cost of medical bills.

2. Helps avoid debt and financial setbacks. Take the above example, which is having a medical emergency. When you have an emergency fund, not only you can pay for other expenses associated with the emergency. It can also help you avoid going into debt.

3. Reduces financial stress and anxiety. To me, this is the most important part of having an emergency fund: Having peace of mind. No amount of money can buy it. Knowing that you have a financial cushion in case of unexpected expenses or income loss, can give you peace of mind.

4. Emergency funds can provide a sense of security. The brain releases neurotransmitters such as dopamine and oxytocin, which are associated with feelings of pleasure, reward, and social bonding. This is what happens when we feel secure and safe. These chemicals help to promote positive emotions and build relationships, which can further enhance our sense of security and well-being.

How much should you save?

The truth is, there’s no exact amount for building emergency funds. Some factors to consider are job stability, monthly expenses, lifestyle, priorities, values, family situations, and personal risk tolerance to name a few.

To get started, first you need to determine how much money you need to cover your expenses for a certain period. Review your living expenses in the last 3 months, get the average, and multiply that by your emergency fund timeframe. The most common recommendation (Randell Tiongson, Fitz Villafuerte) is at least 3-6 months but when I was starting, I based it on my circumstances. I have dependents and thankfully, a guaranteed job for the next 3 years, I started with 1 month’s worth of expenses + 10% of it as a buffer.

Build the habit of consistently setting aside even a small amount. It doesn’t matter if it’s P500 every month or P5000. Saving money requires discipline and a commitment to your financial goals.

Our brains are wired to use mental shortcuts and make quick judgments, which can lead to cognitive biases that affect our financial decisions. Understanding the psychology of money can help us make better financial decisions and develop healthier habits toward money. Adjust your goals based on your circumstances.

How to start saving on a limited income

Before we deep dive into the steps, you have to understand that starting to save on a very limited income requires well-thought planning, budgeting, and commitment. Factors to consider are the amount and period. Once you identify how much will you save and the time frame, contemplate the following steps to save even if you’re on a limited income.

1. Start small. It doesn’t matter whether you start with P500 every payday. Even saving small amounts can add up over time, so start by saving what you can and gradually increase your savings as you can.

2. Prioritize saving: Even if you can only save a small amount each month, make saving a priority and put that money into a separate savings account.

3. Increase income through side hustles or additional work. It’s not easy saving when you’re on a limited income but I am not saying it is impossible. Sometimes, all it takes is creating positive spending habits and creativity to make it work. Sell your services and skills for extra income, identify ways to reduce expenses, or shop around for deals. It’s okay to be cheap.

4. Avoid unhealthy practices. It means prioritizing your needs versus wants. This also means nourishing your body with the essentials and avoiding unhealthy habits. Yourself is the greatest investment you have so eat healthy foods and keep in good shape. 

5.Reevaluate your expenses: Take a closer look at your expenses and see if there are any areas where you can cut back, such as reducing your utility bills, cooking at home instead of eating out, or canceling subscriptions you don’t need.

6. Eliminate debts. Eliminating debt can help you create a better financial future for yourself. By prioritizing debt elimination, you can achieve saving goals faster.

6. Use digital banks that have higher savings rates. I recommend CIMB. I’ve been using this for years now and am completely satisfied.

Tips for staying motivated and committed to building and maintaining your emergency fund

1. Set a savings goal and track your progress. Try using budgeting template like this one.
2. Automate your savings
3. Adjust and re-evaluate your emergency fund as needed.
4. Focus on the benefits: Remind yourself of the peace of mind and financial security that comes with having an emergency fund.
5. Stay flexible: If unexpected expenses arise, never get discouraged. Re-evaluate your budget and savings plan, make adjustments if necessary, and keep moving forward toward your goal.
6. Find accountability: Share your savings goal with a friend or family member who can hold you accountable and provide support and encouragement.
7. Celebrate milestones: Celebrate each milestone you reach on your savings journey to keep yourself motivated and encouraged.
8. Break it down: Break your savings goal down into smaller, more manageable amounts to make it easier to save consistently over time.

In conclusion, although it’s not easy to live on a tight budget and save on a limited income, this doesn’t mean it cannot be done. By keeping long-term goals in mind at all times and making small sacrifices, anyone can start building an emergency fund.

Nothing is more important than prioritizing the provision of a secure future for you and the people you deeply care about. The worry and stress you’ll save yourself will be worth it in the end. opt for the things that you require in the long run rather than what you desire in the short term. Enjoy the advantages of frugal living in exchange for a financially secure future. All this starts with building an emergency fund.