There are 5 different saving funds you should own if you want to get your finances in order this 2020.
Over the years, saving money have become more and more vital. Learning how to save means valuing all your hard-earned money and becoming aware of what your priorities should be. All of us need to save money. It is a financial move that will give you a big edge towards your financial life.
Here’s a list of The Different Saving Funds You Should Own.
1. Emergency Fund
An emergency fund is money saved for life’s unforeseen events such as medical expense, sudden home/car repair, death in the family or unemployment.
This is just a non-negotiable fund to be honest and a lot of financial advocates will encourage you to set this up before moving to any of the other funds you will read below.
Without a cash cushion for emergency situations you'll get left behind. More so suffer from money-related stress brought by not having means to accommodate emergency situations which can happen to anyone!
Here are a number of benefits having an emergency fund can bring to a person:
Financial peace. Because you have a working emergency fund ready, you won’t feel as bothered should a financial crisis come up.
Avoid debt. Unexpected expenses may caught you and your budget off guard. With an emergency fund in place, you won’t need to take a salary loan or personal loan. Your emergency fund will be your first line of defense for the costly debt.
Provide you with option to invest. I’ve shared this a number of times in the blog but it is important to have an emergency fund first before you make any investment. There are risks involved in every investment whether it be the so-called safest investment there is. Having enough savings will help you tackle those risk.
How Much Do You Need?
Prepare at least 3-6 months worth of your monthly expenses.
If you don’t know your monthly expenses or this changes often, you can instead use your month income. Just multiply your current net income to three to get the amount you need for an emergency fund.
You can also start with a Baby Emergency Fund taken from Dave Ramsey's Total Money Makeover. The Baby Emergency is equal to $1000 or for Pinoys it could be just a month worth of your salary.
How Can You Save For an Emergency Fund?
Try saving a good 10% of your salary every month. Automatically transfer this to a separate savings account which you bound not to touch unless an emergency happens.
I also created a big list of ways you can build an emergency fund from scratch.
2. Debt Payment Fund
This saving fund applies if you have existing debts you need to settle.
Getting rid of debt is a wonderful feeling. It’s like getting a much needed rest after a day of hard work. It’s like resting your feet after running a marathon wearing high heels.
There are two kinds of debt in this world. We have what we call “good debt” and “bad debt”.
Good debts are considered as debts that can generate you income and increase your net worth. Best examples of good debts are as follows:
- Buying a camera to start your photography business
- Getting a loan to start your own business
- Obtaining a house and/or lot to be sold or rented out
- Purchasing jewelries or collectibles
- Borrowing money to invest
Bad debts are the dangerous kind. These are certain debts you get by purchasing depreciating assets. Some examples of bad debts are:
- Credit Card used to pay for a want (maybe a new phone, a new appliance at home)
Getting rid of debt such as personal debt, credit card debt or any long standing loans you may have is one of the best financial move you can do in your life. It promotes financial peace and security, more money to spend without guilt and improves your ability to save and invest.
Choose to allot a portion of your income as a debt payment fund. Make sure that you pay your debts so you can use the money to better your finances in the future.
I am fortunate to have not incurred any debt at the moment so my net worth is quite positive. However, I should still take precaution financially.
How Much Do You Need?
This depends of the method you choose to pay your debts.
Dave Ramsey popularized two methods when it comes to debt payment.
First, the Debt Snowball Method and second, the Debt Avalanche Method. Here are the differences of the two:
Debt Snowball – This method suggests that you pay the smallest debt first. Once the smallest debt is done, you will have to pay the next smallest debt until your debt is done at last. Because you are paying for the smallest debt first, you can easily feel the success and this will motivate you to stay focused on your goal.
Debt Avalanche – In this method you will pay the most expensive debt first. Focus on the debts that accumulate higher interest rate. The faster you get rid of the most expensive debt, the more money you can have to pay down the rest of your debt.
How Can You Save For a Debt Payment Fund?
Paying debt on a low income can be a real challenge. You need enough resources to sustain both your needs and your bills.
As much as you want to save and pay your creditors, you feel like there isn’t enough money coming that will enable you. Thus, people often end up with more debt instead.
The very first thing you need to do is to treat debt payment as a goal.
If you see it as a task or obligation you will easily feel discouraged to pay. When you see your debt as a goal you have to accomplish at a given time (deadline), you’ll certainly arrive with a debt payment plan in no time.
Next, include debt payment in your monthly budget.
For example, following the 50-20-30 Rule of Budgeting, you can alter the percentages to accommodate your Debt Payment Fund. With Php 12,000 income, Juan can use Php 6,000 (50%) for essential expenses, Php 4,200 (35%) for debt-payment and 1,800 (15%) for savings fund.
Another way you can save up money to eliminate debt is to increase your income. Find means you can do that will help you earn something extra. Put this extra amount on your emergency fund.
3. Investment Fund
As early as now aim to have your first ever investment. Investing is one of the many ways that you can make money work for you.
Investing is your first big step in creating a passive income or making money work for you and not the other way around.
Why you should consider investing your money?
1. You are not getting younger. Common regret for older people when it comes to their finances is that they don’t invest as early as possible. Just like the popular Chinese proverb that says: “The best time to plant a tree was 20 years ago. The second best time is now.” You need to plan your retirement as early as now.
2. You have familial responsibilities. Whether you like or not you have familial responsibilities. You owe it to your family and your soon to be family to be financially prepared. Investing gives you a chance to make your money grow.
3. You have to make your money grow. If in any rare case you have money surplus then investing is a good way that you can spend your money intelligently. Worried about the concept of investing?
Here are the things that could help ease the worry and fear of investing.
- Be Informed
- Have an Emergency Fund
- Study your Investment venture
- Learn from the Expert and Experienced
- Know that God wants you to be Financially-blessed
How Much Do You Need?
This will depend on the type of investment you want. Nowadays a good Php 5000 to Php 10,000 is enough for an initial investment on traditional investment vehicle like mutual fund or direct stock market. You can also save more money as soon as you start diversifying your investments.
I have shared a number of investment vehicles over the years. Here they are:
Investing in Exchange-Traded Fund
Investment options you can try with your bank
How Can You Save for an Investment Fund?
Cut-back on your unnecessary expenses and slowly move the money you save on your Investment Fund. You can also use any cash bonus you receive from promotion or simple salary increase for your investment fund.
4. Sinking Fund
A sinking fund is typically small amount you set aside every week, every month or every year into a specific goal that’s personal to you.
People build a sinking fund to purchase furniture, luxury items, gifts, upgrades and such. This is also the same fund you build for dream vacations like a trip to El Nido, Palawan or your first travel abroad.
To know more about sinking you can read this post – Sinking Funds – What, Why and How
How Much Do You Need?
This depends of which short-term financial goal you want to achieve first.
Make sure you have a list on hand, estimated the amount you’ll need and target date. Then, work your way backwards.
For example, you want to give gifts to your family, friends and officemates during this Christmas. Without a sinking fund, you will be buying items using your usual salary or your bonus. But when you have a sinking fund ready, the amount you need to treat your loved ones can be built little by little months away from when you actually need it.
So if I want to budget Php 5,000 for gifts this Christmas, my sinking fund starting June will be Php 850/month or setting aside Php 425 every paycheck.
With a sinking fund, you will still be able to use your bonus for other expenses that matter. You can use it as initial investment and open a mutual fund account. The possibilities are endless because you are able to prepare for it months in advance.
How Can You Save for a Sinking Fund?
Sinking Funds are real game changer when it comes to making an effective budget. It allows you to prepare for weeks and even months ahead of time for expenses so that your budget won’t get ruined.
Not only is it effective but also easily modified to your current budget method. Just do the three step process:
Step 1. Think about what you want to save up for
Step 2. Know much you need and when you'll need it
Step 3. Include it in your budget categories
Again you have to make sure that you have funded your Emergency, Debt Payment and Investment Funds first before transferring any amount to this fund. Priorities, remember?!
Now having an extra income will help you tremendously to build your Sinking Fund without hurting your budget. There are many proven ways you can diversify your income. You just need to be really "madiskarte".
5. Retirement Fund
According to this January 2017 news report, over 41 percent of older millennials, aged 24 to 35, predicted that they won’t be “financially secure enough to retire until they are older than 65,”
This survey result is heartbreaking.
I started planning for retirement at 19. And now at 24, I am still far from the ideal financial independence and early retirement I dream about. But, because I started young I know for a fact that I had within me the power of compounding.
Compounding is too powerful that someone who started saving at age 25 will end up having double the amount of someone who started saving later at age 35 even if they both save Php 1000 a month.
Here’s the truth:
Investing for your retirement during the early years of your career is one of the best money moves you can ever do for your(future)self.
You will never be young forever so you better start thinking about your retirement, too.
A lot may ask what age a retirement fund should be started and the definitely answer would be as soon as possible. Saving for your retirement will enable you to enjoy your harvest season. The earlier you start more your money will grow.
How Much Do You Need?
Nowadays you just can't entrust your retirement fund to government-issued policies like SSS or GSIS. You won't survive with the inflation rate and the future cost of living. If you want to retire happy you need to start saving and investing accordingly.
How Can You Save for a Retirement Fund?
Start by saving money on a quarterly or yearly basis. Commit to a certain amount you can fund. Then add whenever you are financially equipped.
Final Notes from SavingsPinay
If you have the above saving funds done you are surely get on the right track towards financial freedom. My main tip is to take it slowly but surely. Focus on building one fund after the other.
Which fund you want to start saving? Which fund you are currently saving for? And which fund you've already accomplished?
