The fear of the Covid-19 pandemic has delayed the plans of many from investing in properties as the priority shifts to growing the emergency fund, even more than what is necessary and safe. While an emergency fund is an important safety net, there are huge opportunity costs to growing your funds beyond the necessary level. If you are fortunate to have maintained a stable income through this pandemic, then, you are better off investing your money (in excess of your emergency fund) in real estate, so you can take advantage of the short-term opportunities and long-term benefits in the market.
How much is a Safe Emergency Fund?
An emergency fund is readily available source of cash to help you navigate financial dilemmas, which should last you for a six-month period without affecting your current lifestyle or force you to liquidate investments that you otherwise would want to hold onto. This will give you enough time to adjust to the situation or get back to your normal financial situation.
Your emergency fund should include your regular expenses for:
(1) Basic needs, such as for food, clothing and shelter
(2) Spending on wants, such as for shopping and travel, and
(3) Budget for monthly outlay for investments, such as for the monthly down payment or amortization
While your priority is to build and maintain an emergency fund, with or without crisis, any excess beyond the safe Emergency Fund should be safely invested in appreciating assets like real estate, as there are huge opportunity costs with too much savings.
What are the Costs of Having Huge Emergency Fund?
(1) You will not be able to take advantage of the short-term opportunities in the market today such as the most generous payment promo terms offered by the developers and below market value deals. Read more: 4 Underrated Benefits of Buying Pre-selling Properties in the time of Covid-19
(2) You will not be able to maximize capital appreciation sooner. Despite the pandemic, the real estate market is set to bounce back sooner. Read more: Is it Wise to Invest in Real Estate, Amidst Covid-19?
(3) You are losing money due to inflation. Read more: Why a Huge Bank Account Should Scare You?
Lucas is a young working professional who has a monthly income of Php80,000 and has an average monthly expense of Php50,000, which covers all his basic needs, regular shopping expenses, travel plans and others. In addition, he has Php500,000 saved up as an emergency fund.
Lucas is familiar with the Emergency Fund and wants to check if he has enough savings to last him six months when taking into account the additional Php30,000 monthly downpayment of the 2-Bedroom unit he is eyeing. Here is his computation:
Even in the worst-case scenario, Lucas has enough in his Emergency Fund to last him six months. He is confident that he has enough time to adjust and recover, he knows he can safely invest in his dream home.
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ABOUT THE AUTHOR
Edric Maguan is a successful real estate investor, an experienced and accredited Real Estate Broker of several top developers, and a Certified Public Accountant from University of the Philippines - Diliman. He found his passion in inspiring and empowering people to make the most out of their hard-earned money through real estate investment.