As a starting point, it should be an amount that you feel comfortable and secure with. From there, there is a minimum recommendation for the emergency fund that goes from 3 to six months of your fixed expenses. In case of doubt, it will always be better to stay in the high range of the calculation.
To calculate your contingency cushion and generate a good emergency fund, the first thing will be to write down your essential fixed expenses. This may be a good time to reflect on how and on what you are spending the money and implement the envelope method to save that we explain in the following video.
Once you have calculated the fixed costs you have and expect to keep, you only have to multiply them by six. This way you will know how much you need an emergency fund that helps you to have a finance approves of bombs,
How long will it take to collect your reserve fund?
It is normal, to generate the savings you want take some time. If you need to know how much to set a temporary goal for, the calculation is easy. You only have to divide the money in the fund between the amounts you save each month.
As an example, let’s make numbers. Let’s imagine that you have an income of $1,000 per month and fixed non-renounceable expenses of $800. In this case, the amount of the emergency fund will be $4,800.
Let’s say you start saving 5% of your income or $50 a month. It will take 96 months to get the capital together. If you raise the rate to 10%, it will only take 48 months.
Where do I put the emergency money?
It’s easy for your first response at this point to be under the mattress. Avoid this temptation if you want to save automatically. It is better to have the emergency fund in an account or other financial products that, in addition, will help you avoid the temptation to use it unless it is necessary.
When placing that money do not lose sight of the three blocks of financial planning to those we linked before. In addition, the place where you leave that money must meet two specific conditions:
- Or as it is known in financial terms, liquidity. In other words, to be able to access money easily and almost immediately.
- Do not play with your emergency fund. Bet on risk-free products where you know you will not lose money.
One of the most common errors at this point is making the emergency fund profitable. In other words, seek to obtain a benefit for that money. Remember what your main goal for that emergency mattress is: that it is always available in a safe place because you may need it at any time.
In this sense, a remunerated account or a renewable short-term deposit will automatically be the best options.
And the profitability? To look for profitability and grow your money you already have the rest of your savings, as we will see below.
What to do when you have already created the emergency fund?
Keep pre-saving! The contingency fund for contingencies is only the first step towards financial freedom, the minimum safety net you need. Now that you have started saving, it will be easier to continue than to stop. If you lack motivation, what do you think about achieving a golden retirement or taking a sabbatical as objectives?
When to use the emergency fund?
When you really need it, when it really is an emergency and an undertaking. As an example, if the car breaks down you can go to it, as well as if the washing machine is broken. However, you should not do it if you know that you are going to change the car in a year or that you will shortly have to renew the appliances. That kind of expense, you can budget and you should do it.
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