Everyone, individually or as a family, should have an emergency fund to deal with the contingencies and setbacks of life. But what is an emergency fund, how much money should be saved in that emergency fund, and how long should those finances be able to sustain you?
An Emergency Fund
An emergency fund is a quantity of money that must be set aside but available in a liquid form to cover contingencies and emergencies to cover fixed expenses for a few months. When an emergency fund is characterized as liquid, it is meant that you can use it from one day to the next without losing purchasing power or being penalized for the release of this money.
How Long Should It Cover?
Calculate the expenses and economic needs you have each month, including electricity, water, mortgage, food, etc. The emergency fund should be able to cover those expenses for 6-12 months in case no additional income is received during that period. This eliminates the need to sell any assets.
It is estimated that more than 70% of people do not have savings to cover more than 3 months in case they stop earning income tomorrow, which is a sign that their finances need immediate attention and a savings plan developed.
How Much Money Should Be Saved?
Many people assume a minimum of $3,000-6,000 is sufficient, but an emergency fund will depend on your current lifestyle. Some families have such a frugal lifestyle that only $3,000 could sustain them for 6 months. Other families have fixed costs that would require a fund of $5,000 that does not cover them for even two months.
Other than stipulating an amount of money to keep in the emergency fund, it is better to determine the time the funds should cover. An emergency fund ready for economic catastrophes should be able to cover at least 6 months of fixed expenses.
Psychological Factor
Nearly anyone can experience a personal financial crisis or distressing situation at a given moment in their life. It is important to avoid panic and think in a relaxed and realistic way. Avoid making desperate decisions because rarely do these decisions come to fruition. An emergency fund will give you peace of mind and stability, as well as the patience necessary to develop a strategy.
Loss of Employment
Some people see a job loss or unemployment coming, while others are caught by surprise. When our economic situation is going well, we should look for alternative sources of income and plan our emergency fund. Remember that sooner or later, things are bound to happen, and the only way to avoid a negative impact is to be prepared.
External Factors
The world economy or national economy can cause our bills to increase. We can find astronomical price increases in basic products, electricity, water, etc., and this situation usually coincides with a decrease in salary to avoid downsizing personnel.
Unforeseen Events
Your car can break down at any time, and the repair can be expensive. In more extreme cases, you may have to replace it completely. Likewise, home appliances can suffer a small breakdown and disasters that insurance does not cover. Your emergency fund will prevent you from using credit to pay for damages or disasters.
Diseases
If you are self-employed, an emergency fund should be a priority for you because being sick will prevent you from working and earning money, and medical procedures can be costly. Similarly, for pet lovers, veterinary services are not inexpensive. An emergency fund can be utilized to compensate for time not worked, medical bills incurred, or veterinary services for beloved pets. Regardless of the medical situation, it is best to be prepared and have liquid cash to mitigate financial stress.
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