What It Takes to Build Your Emergency Fund?

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Question: "Hi, I am an OFW here in London for 8 years. I followed your blogs every week and I'm  so inspired by your story on how you managed your income, saved it and invested it. I'm single,earning well but honestly I dont have savings. Most of my income are sent back home to support my family and pamangkins education in the province. I see them as my investment. However, lately, I felt guilty because I've been helping others but I'm not setting aside for myself. What should I do now?"

Grace Gomez, Nurse,sent by email

Thank you for your message and I'm glad that you took the time to bring up your financial concern. First, I appreciate you for acknowledging this problem and second, I admire you for having such a big heart to help your relatives...You seem a very kind and generous person. On the other hand, you sounds like frustrated and feeling something like that is a good thing. That means that you've already woke up! I tell you now, it's not only you who's experiencing this dilemma. 

It has been  a long practice in our culture the "Padala-Probensya system". That shows our strong family relationships. I don't have anything against it as long as it is still on the context of balance. The greatest investment is yourself. My blog today is not about how to stop extending help to your relatives but to balance things up. You have to consider also the other side. I will sight you an example...

 Not too long ago, I did not know how important the Emergency Fund is, to its core. All I knew is that it's part of the process that I need to go through in investing. So basically , I have set already an Emergency Fund good for 6 months ready for use (I did it reluctantly, though!). 

One day, I felt something bad and I felt sick and some parts of my body were in so much pain. I thought it was just a "trangkaso" and the following day I was so weak. When I went on check-up, I was told that I had an adult chicken pox. Worst thing was, my bosses wanted me to be on a long sick leave for the whole month. They want to make sure that I can't harm others due to our close-knit workplace and I might infect others as well if I would just spend few days without complete recovery. So I spent a month with all of the expenses from my Emergency Fund. That's when I fully I understood it, with a big sigh "Buti na lang!" From then on, Emergency Fund for me is so important that I can use it on an unforseen circumstances.

If you haven't been able to build your Emergency Fund, I want you to start now. We don't know when we will be needing it the most. It is just very simple but the struggle boils down to its greatest enemy, YOURSELF! What are the things to consider when I am building my Emergency Fund? This is always the common question. Learn from my personal experience...

1. It will take 100% self-discipline.

I asked myself if an Emergency Fund is so important, Why many Pinoy are not paying much attention about it? I got a quick answer, we dislike consistency as we dislike discipline. It is boring and painful, indeed!

This happened last year when my friend who had a pregnant wife for their first baby. They were so excited and the pediatrician told them the schedule of the expected delivery. They did not prepare much about it because their expectation that it would take few months to go. Then one day, He was shocked because her wife was rushed and he was informed on duty that his wife was having a premature delivery. He could not imagine how shocking it was without any much preparations!

As my friend told me about it, the doctor refused to do the procedure because they need to give a cash advance. It took few hours before he could borrow a needed amount while the wife was already in pain. That was a very unpleasant experience. Although, the delivery went well, that was supposed to be a joyous experience but they're looking back with a hard lesson and remorse. 

When I decided to build my Emergency Fund, it took me a while to find its deeper purpose and it needs to be self-convincing because I can't trust myself. I could be too excited to start but I will end up not saving something at all. So I thought of realistic "What If's"! What if I would lost my job tomorrow? What if I'll get sick and needed immediate operation? What if one of my family members is on an emergency and needs immediate assistance? This is where this fund comes into play. 

2. It will cost your social life.

When I started to build my Emergency Fund, I started to cut expenses. You know already that my salary is just an average call center agent can get. I started cutting expenses from my favorite leisure; hanging out with friends, going to the cinema, and spending time in an expensive coffee shop to maximize my savings. So what I did, I became active in social media to still communicate to friends, minimized going out when unnecessary and do online shopping if needed. I also bought packs of 3 in 1 coffee (It tastes and smells the same like coffees in Starbucks anyway!). 

Yes, I've lost bunch of friends and keep some. I also joined financial groups in FB and met some same  "kuripot friends". Now, I feel good and spend time with the right people and at the same time, I was able to reached my financial goals.

3. Many will dislike you.

We tend to have an advance thought that these type of people are selfish and hoarders. I am one of them and I raise my case! Kuripot people are the best people that you can have as a friend and rest assured that we will not borrow from you. I saw many relationships became sour because of money matter and unpaid debts. 

So if you are dislike because of you being kuripot, they are not friends for keep. A funny quote from local celebrity Keanna Reeves once said; " It not my lost it Yours!

4. Some of the favorite lists might need to be put on hold.

I received a sermon coming from my cousin saying that it is okey to be frugal but I don't have to save too much. How could we know that we are already saving too much? For me, saving too much means not being able to maintain your basic needs. Basics needs has never been a question for me, it always my top priority. According to my budget, top of my lists is the food allowance and next things are all considered secondary priorities. I'm also setting aside now for leisure, travels, personal stuff, and for others (mission, charity, relatives assistance).

5. It will take time.

My early days on saving were mostly trial and error. It took me months to apply it seriously. I tend to go back to my past practices and that was so frustrating. I finally found a mentor that is so successful in building his Emergency Fund. I reached out to him  and asked for guidance. He gave me some mathematical computation but what sinks in to me was to do it over and over again and learn from past mistakes. Your goals won't become a reality until you make it a priority. Read my friend's inspiring story on how she was able to build her Emergency Fund and started investing

In Search of the Way to Save

Looking to the stars - Calvin & Hobbes

Personal finance is personal. Rule-of-thumbs may be a good start, but it surely isn't for everyone. I certainly have my own way to budget, and out of all the apps I've looked through to help me, not one found to be a perfect fit. I then stumbled upon an iOS app, earmark. It's a social saving-spending app for you to set the top five things you'd like to buy and share it with everyone, including status updates when you forego spending to save for said five items. Pretty neat.

Three things I like about this:

1. Clarity. It would help me take a step back and remind myself that I have saving goals to achieve. In moments of need of clarity, I think this app would help me when my mind start playing the justifying-a-purchase games.
2. Motivation. We are social beings and our motivations sometimes require that social interaction. "Not buying this for that trip, proud of myself", and then receiving a supporting reply from a friend, "you go girl! let's make it to Makkah". Seriously, saving for hajj is hard...
3. Communication. Sometimes other people make our personal spending plans. Hanging out, do this, eat that. Those things add up.When we make it known to friends we're saving for something, it makes communicating personal intentions and rejecting an offer a lot easier.
4. Behaviour. People get easily hooked on social media outlets. If we get hooked on the app, we get hooked on our goals, we will achieve it.

What I don't like, but they might actually be right, is;

"We hate budgeting. 

So does everyone, ever.

We hate budgeting. So does 99.9% of the population.

We also like spending money. So does 100% of the population. 

Earmark helps people who hate budgeting save money while spending it."

I like that I've set myself a budget. It's life changing. But I guess for those who haven't, this app might actually work. For myself. I don't know. I don't have an iPhone. What I'm interested in most is whether I can apply earmarking [designate (something, typically funds or resources) for a particular purpose.] for myself.

So, what I'm proposing to do is to:

1. Unify my goals. I'm going to follow the findings that people become better savers when they have a single goal (pdf link). So I'll unify a single goal to the items I'd like to buy with a goal of higher calling or a long-term based goal like retirement.
2. Partition. Increase the chance of success of earmarking by separating the money physically, especially if the money has a visual reminder (pdf link). So, create a custom printed wristlet, or wallet (2), with a picture as my reminder.

Now, if I have a wallet for zakah, what are my visual cues...

"Is the description of Paradise, which the righteous are promised, wherein are rivers of water unaltered, rivers of milk the taste of which never changes, rivers of wine delicious to those who drink, and rivers of purified honey, in which they will have from all [kinds of] fruits and forgiveness from their Lord, [...]"

47.Surat Muĥammad (Muhammad; 15)

"He will forgive for you your sins and admit you to gardens beneath which rivers flow and pleasant dwellings in gardens of perpetual residence. That is the great attainment."

61. Surat Aş-Şaf (The Ranks; 12)

One way ticket to Jannah. Insha'Allah.

Save Every Time You Spend!

Boy, that title sure does sound like a salesperson trying to sell a scam. I don't know about you, but when I hear programs that puts "save" and "spend" together, I sense trouble. The programs utilizing spending as a means to save available to you are:

1. Bank of America Keep the Change;
2. Wells Fargo Way2Save; and
3. A non-bank offerings from Saved+

They all have one thing in common, automatic saving. The Way2Save and Saved+ offer something similar, in every transaction you'll have money saved to your saving account. For Way2Save, it's a flat $1 put into your savings account per transaction. Saved+ gives more control to the consumer to set the percentage they want to save per transaction. So, if I set it to 10%, when I pay my bills of $100, it'll automatically save $10.

BoA's Keep the Change, on the other hand, applies the classic "save your change in a jar" to debit card transactions. 

There may be things that you may need to pay attention to, like fees for having the savings account, taxes for the matching incentives given, and so on. If you use Saved+, you'd have to pay attention to your budget closely, because it will add up. I'm not saying that these programs won't work for you, I'm saying these programs won't work for me. My way is the old school way of using jars/envelopes and saving before spending.

It is, however, possible to save by spending if spending becomes "spending". Meaning, you spend on your future self by purchasing securities, precious metals, and transferring payments to yourself as savings.

Higher Learning and Higher Earnings

What I learned so far in my life is that how well you do during your bachelors matter a lot on getting that first stepping stone. But what's also important is no matter what job you have, making the right financial decisions and having the discipline to save and invest is the stepping stone to a better financial life.

I was made aware of the Social Mobility Index from my university's Facebook page. It's an index that ranks university based on tuition, economic backgrounds, graduation rate, early career salary, and endowment. When it comes to making the correct financial decisions, we'd have to group ourselves to the university that we can afford. Once stepping out of the financial bounds is when we make the first mistake. The second decision is making sure we study for a profession that we want to be in, and consider the earnings made in comparison to the tuition paid. In other words, calculate your return on investment in getting that degree.

I made none of those considerations in the past, but I'm going to make sure my kids give it some thought.

Training Your Wealth Accumulation Muscle

Image from abqjournal.com

Spend less than earned. Accumulating wealth is easier said than done. Accumulating snow and turning it into a snowman however, never felt that difficult. We start with a handful then roll it on the ground until it gets really big. It turns out that the method to building a snowman, called the snowball method, is the most effective way to pay off debt. I am proposing that it can also be an effective way to build our wealth accumulation muscle.

The snowball method can be similarly applied to how we build wealth. We start with small wins that gets us immediately hooked to the challenge to better the previous win. It keeps going and rolling until we reach the big win.

Let's play a game!

You'd like to save $2000, that is your created imaginary debt. Split your debt unequally in amounts that you need to pay off and prepare envelopes for payments to the debt. The maximum split is 5, but let's say you have split it up into 4 different debts of $100, $400, $700 and $800 totaling to $2000. Search "average credit card interest rate" on Google, you'll have an average number for all those debts, in this article's case it's 15.6 percent.  

Now, you might be asking why maximum split of 5? Because we'll be using Bankrate's minimum payment calculator and it gives the maximum of 5. The rule is you need to pay all the cards monthly, so if you're focusing on one card with the lowest balance, you'll need to pay the other cards at minimum. Enter the debt amount, interest rate and minimum payment percentage to get your minimum amount. 

Can we fix our finances? Yes!

Can we pay off our debt? Yes!

Can we build wealth? Yes, we can!

Why We Can't Save

Blindly spending - Image from Wired.com

Based on my own experience, the one reason why I don't routinely save is because I didn't plan to save. Once I planned, I started saving though it's not a significant amount but it's still saving. Some people might feel that saving is only for people who are in a privileged position to do so, but that's very far from the truth. Everyone must save. Everyday I pass by beggars and I wonder how they they eat for the day. They save for it. And they probably budget too. They know how much they need to live for the day, and save the money they have for tomorrow.

So, if we feel like we can't save, there's probably an amount that we can save but seems too insignificant. In the end we choose not to save. Or, we actually lack the knowledge of how much we can actually save because, like I did for the past 10+ years I didn't plan to. Budgeting or planning is a duty implicitly mentioned in the Quran.

They ask you about wine and gambling. Say, "In them is great sin and [yet, some] benefit for people. But their sin is greater than their benefit." And they ask you what they should spend. Say, "The excess [beyond needs]." Thus Allah makes clear to you the verses [of revelation] that you might give thought.

2. Surat Al-Baqarah (The Cow; 219)

When people are asking how much they should spend on charity, the answer was "the excess". How much is excess? We wont know if we don't write it out on a piece of paper and break down our spending. Not planning is intentionally blindfolding yourself from your money. And if you blindfold yourself from your money, you are risking of going in circles doing what you've always done with your money. Which was not an ideal situation for me.

The Gadget Purchase Rule

What's Next For YOU To Buy!

I'm an avid gadget-news follower, but I don't really buy them. I've mastered the skill of waiting. The wonderful thing about gadgets is if you know what's coming next, and the one after, you'll be able to delay gratification. I've wanted an Apple computer for a long time. Maybe since 5 years ago. Every year I've successfully waited for the next Intel chip, and the one after it. However, since all those years, I've not saved up any money for my purchase. Which is a terrible waste of time and money I could have saved.

I've created "The Gadget Purchase Rule" for people who, like me, love gadgets and would love to purchase them. The rule determines which gadget is affordable within your means.

It's a very simple rule;

price of gadget/20% = amount needed to save

After succeeding to save the amount, you will be able to take 20% of amount saved as a reward to purchase the gadget. Also an additional rule, if the gadget is updated yearly and you plan to update yearly, you'd have to save that amount yearly.

Example, An unlocked contract free iPhone, $649/20% = Save $3,245. You'll have a savings of around $2,596 and an iPhone as your reward. If you'd like to upgrade yearly to a new iPhone, you need to save $3,245 every year. If you can't do that, then it is not a phone within your means.

Another example, I'd like to purchase a Mac Mini. $799/20% = Save $3,995. I plan on using it for a good 3-5 years before upgrading. I'd need to save $3,995 in at least 3-5 years and finally deserve to have it.

It might sound too extreme at first, but really that is the challenge to not only delay gratification but also build up savings. Because we should treat our savings like trees, plant when there's too few, but when in abundance, it does not mean we can cut and use it all.