Importance and Characteristics of a Rainy Day Fund
By: Romeo Arahan Jr.
One of the pre-requisites in pursuing financial freedom is to have a rainy-day fund, or an emergency savings fund. What it does is it provides an individual, access to funds in an extremely urgent and critical event. SEDPI advises its participants to follow the three rules in forming their rainy day fund. First, the amount should be equivalent to six times their monthly income or nine times their monthly expenses. Second, the fund should be liquid. Third, the fund should have restricted access.
“The fund should not be accessed at all times because it should only be used in matters of life and death. By the time it should be used however, it should be readily accessible,” Romeo Arahan, SEDPI program officer said in one of the trainings for the Financial Literacy, Leadership, and Social Entrepreneurship (FLSE) Program in Pototan, Iloilo on November 21, 2015.
The participants in Pototan, Iloilo had a different opinion on the rainy day fund. Being the rice granary of Iloilo, majority of the participants are saving their hard-earned money and invest it in agricultural-related activities. Aside from rice farming, they venture into hog raising, which can also provide additional income for their families. Arahan, however, advised against the practice of using the rainy day fund for investing. “The rainy day fund is there to have easy money in cases of emergency. If the fund is used to buy for pigs, it will hinder liquidity. By the time the individual needs the money, he still needs to sell the pigs at the value of the rainy day fund, which might take a long time. Because he needs the money right away, he will be forced to sell the pigs at a lower price,” he explained.
This also goes to investing into other physical assets like jewelry, as a participant shared that he already has an established business and is keen on investing his rainy-day fund to buy jewelry. “For jewelry, it will provide easy liquidity because there are numerous pawnshops in the area. However, the pawnshop will charge interest every month until the principal is fully paid. In this sense, the interest paid could have been added to further build up the rainy day fund,” Arahan shared. He added that if selling jewelry is an option, there should be an extensive network of prospective buyers who are willing to pay at a preferred price which might also take a long time to establish.
In both cases, SEDPI recommended putting the emergency savings fund in a rural bank in their municipality. “In this way, they are not only preparing for their financial freedom, they are also helping the rural areas by putting their funds in these banks,” Arahan ended.
The training on financial literacy is the first in a 12-week training under the FLSE program for families of overseas Filipino workers.