Friday, March 22, 2013

How to Calculate Our Emergency Fund

Great Eve,

This will be a long post so please bare with me :) It's been 10:18 pm now here in the Philippines and I was able to browse this blog from a blog author named Fitz. I have been reading financial blogs this past few months and I have learned a lot already but what's missing on my part is the word "ACTION", when will I act to what I have read? Well, the sooner the better.

When my mother has been brought to the nearest hospital here in Iligan City (Dr. Uy Hospital) last August 2012, it changes everything on. My life, faith in God and how to look at money the other way not like what I have been thinking before, that "Money is the root of all evil". From that point on, it changes my mindset on how to look at the word "Money".

My mother has been diagnosed to have a diabetes. I swear to God that it does shock me knowing it. Mom has been healthy this past few years (by the way my mom is 48 years old now) and she was never been brought to a hospital since birth. She does goes to a doctor for body check ups but never been brought to a hospital.

When we are at the hospital, my mind was busy finding ways how to solved the hospital bills afterwards and at the same time very worried about my mom's condition. I am very thankful I did continue paying her Phil Health quarterly and it does help us paying the hospital bill and some of her medications. But still half of our hospital bill should come from my own wallet and my wallet at that time is really "0", I have no savings, emergency fund, etc. that I can use for that. It's really embarrassing and disgracing on my part as a daughter.

So what I did was I loan a not so big amount to someone and will pay that loan every month without interest, that person was an instrument given to me by God to help me and I am very thankful.

Few months from that I did make a move on how can I start to be financially educated. I attend financial seminars through IMG-Wealth Academy and became a member last December. I get my own health/life insurance from KAISER. I then started to read so many blogs about how to be educated financially. I have been working online for almost 3 years already and I do honestly say that I didn't saved, it's really embarrassing but right now I am slowly making myself to changed my habit I have been doing before.

So right now, I will start to build my emergency fund. My IMG mentor said that I should make it liquid, so meaning I should put it on a bank for me to easily access it in case of emergency. He did let me take note that "Emergency Fund" should be used only for emergencies like what happened to my mom last year. I should not touch it anytime that I want to.

Then I stumble with this blog from Fitz Villafuerte "Emergency Fund Calculator: How Much Money Do You Really Need to Save?".
His answer was very basic - The simplest and basic answer is 6 months worth of your income. Or 3-6 months of your income.

He cited different steps on how to calculate our emergency fund.

  • We should start at our Monthly Expenses (ME).

 I am not tracking my expenses for the past years but right now I am tracking it daily. Yeah, you heard me right! I am tracking it daily :)
We should list of our expenses every month like for debt and mortgage payments, food and grocery expenses, utility bills, insurance, entertainment and any expenses you are doing for a month. This is what we call ME.
"Mine was: ME = PHP 8, 067" 

  • We should know our Income Margin (IM)
He said that if you are an employee and you income is fixed every month, this means that your income margin is 0. If you are a self employed like me there will be good and lean months, so my income is not fixed. I can shockingly received bonuses from my boss. I said shocking because I did not expect when will he give it to me in a year and how much it will be.
To calculate our IM like me, I have to subtract the my highest income I received for the past year to the lowest income. 
"Mine was: (Highest Income) PHP12,900 - PHP 12,200 (Lowest Income) = PHP 700
  • We will calculate our Income Handicap (IH)
Our Income Handicap is a factor that relates our ability to find a new source of income.
For employees, this means how long can we find our new job. For a freelancer or a self employed like me, this is how long I can find a new boss or client.

The author gives example on how to calculate this. If we are employed for four years then our IH is 2.  If you  are employed for 1 year then your IH is 0.5 . If 6 years then IH is 3.

"Mine is 3 years so my IH is 1.5."
  • Last is our PE (Possible Emergencies)
For example was when my mom was brought to the hospital, the PhilHealth help her in some way but it is does not fully covered all the medical expenses. Another is when there is a typhoon or flood that will occur in your area. It is hard to calculate but we should estimate how much this would cost us.
"Mine was PHP 7, 000"

Now the formula on how to calculate all of this:

Emergency Fund = (ME x 6) + (IM x 3) + (ME x IH) + PE

This is how I calculate Mine: 
EM = (PHP 8,067 x 6) + (PHP 700 X 6) + (PHP 8,067 x 3) + PHP 7,000 = PHP 69,602.5

Now I know what should be the Emergency Fund I should have on a bank.

One lesson I've learned from this,  "I should start building my Emergency Fund NOW!" not later but NOW!" It is better to be safe and sorry after all :(...

Thank you for bearing with me on this long post :)

Till next post....I should now go to sleep,'s 11:34 PM now :)




  1. I'm currently trying to create a sound financial plan for my accumulated savings. Thanks for this useful tip.

  2. Hi Thomas,

    Thank you for your comment. I am glad that this post is a useful tip for you.