I have posted topics about emergency fund and I would like to add some points in regards to it.
If you remember in my post 7 Rules of Stock Investing, setting up an emergency fund is rule no.5. Now besides having an extra cash for personal use and bargain buying, one has to have emergency funds for the unexpected or unplanned events or expenses in life.
Now how does this relate on achieving debt-free status?
Well often times most people borrow money due to emergencies.
It could be a SSS Loan to cover an unexpected operation or hospitalization. A credit card loan for a plane ticket on an unexpected family emergency or “utang” to your office mate for your son or daughter’s unexpected school outing. Yes you incur debts out of thin air just like magicians, payables just come out just like that.
These are the very reasons why you go from break even to broke.
You were doing fine or okay balancing and budgeting your paycheck to paycheck and on the way of finally scrapping “savings” but as the famous commercial of the insurance company Allstate in the USA, MAYHEM just comes into the picture.
Your Emergency fund actually acts like your insurance only that this one is your very own. This fund should not be touch for your “wants” emergencies. You should not get money from this fund if you wanted to buy a flat screen TV when there is a 50% sale in SM Appliance Store. Yes it may be a bargain but it is not an emergency.
You must clearly define an emergency in order to pull out money from your emergency fund. Also you should be consistently putting in money to your emergency fund, not only when you have leftover after allocating your funds. No matter how small you put into this fund surely when the need comes it will help a lot.
So in line with your debt-free goal, make it a habit to allocate to your emergency fund.