THERE are expenses that we can plan for. We know when tuition is due, when insurance premiums have to be paid and when monthly bills will arrive. But there are also expenses that come without warning. A medical emergency, a major car repair, a problem at home or a sudden loss of income can easily disrupt even a carefully prepared budget.
This is where many people get into financial difficulty. When there is no money set aside for emergencies, they are forced to look for other sources of cash. Some use their credit cards, others borrow from relatives or friends, while some sell investments that were originally intended for long-term goals.
None of these choices is ideal, especially when the need for money is urgent. If you have to use a credit card to pay for an emergency and you cannot settle the balance immediately, the original expense can become more costly because of interest and finance charges. If you are forced to sell investments when markets are down, you may realize losses simply because you needed cash at the wrong time.
The first question, of course, is how much should be saved. A common rule is to keep around three to six months’ worth of regular living expenses. The exact amount will depend on the person’s financial situation. Someone with a stable job, low debt and multiple sources of income may be comfortable with three months. A person with irregular income, dependents or greater financial obligations may need a larger reserve.
The amount can seem intimidating at first. Suppose monthly household expenses are P50,000. A six-month emergency fund would require P300,000. For someone who is just starting to save, that may look difficult to achieve. This is why the important thing is not to wait until you can save the entire amount. Start with what you can afford.
If you can consistently set aside 5 percent of your salary, start there. If your cash flow improves later, increase the amount. What matters is that the fund grows regularly until the desired level is reached.
The next question is where to keep the emergency fund. This is where liquidity becomes very important. The purpose of the fund is not to earn the highest possible return. Its purpose is to make money available when it is needed. There is little value in having an emergency fund if the money is locked in an investment that cannot be accessed quickly.
A savings account is therefore one of the simplest places to keep it. The return may not be high, but the money can usually be withdrawn when needed. It may also make sense to separate the emergency fund from the account used for daily expenses. When savings and spending money are placed together, it becomes easier to use part of the emergency fund for ordinary purchases.
Some may choose to divide the fund among several liquid instruments. A portion may remain in a savings account for immediate needs, while another portion may be placed in a money market fund or short-term deposit that provides a slightly better return.
There is nothing wrong with trying to earn something from idle cash, provided accessibility is not sacrificed. In an emergency, liquidity should still come first.
The third question is when the fund should actually be used. This is where discipline is often tested.
An emergency fund is meant for genuine financial emergencies. Medical expenses, urgent home repairs, major vehicle repairs or essential living expenses after a loss of employment would normally qualify.
A vacation would not. Neither would a new gadget, or a shopping sale that went beyond the monthly budget.
If the fund becomes a convenient source of money whenever regular cash runs short, it will eventually disappear. This is why it helps to define what qualifies as an emergency before the situation arises.
Once part of the fund has been used, it should also be rebuilt. If P50,000 is withdrawn from a P300,000 emergency reserve, the goal should be to replenish that amount as soon as cash flow allows. Otherwise, the next emergency may arrive when the financial cushion is already smaller.
People often become excited about investing because it offers the possibility of higher returns. But before looking for the next stock, fund or other investment opportunity, it is worth asking whether the basic financial foundation is already in place.
Life will always have surprises. We cannot prevent all of them, but we can prepare financially so that when they come, one unexpected expense does not become a much bigger financial problem.
Rienzie Biolena is a Registered Financial Planner of RFP Philippines. To learn more about personal financial planning, attend the 118th RFP program this October 2026. Email info@rfp.ph or visit rfp.ph to learn more about the program.
