Importance of having an Emergency Fund

Having a safety cushion that helps us in our most difficult moments, those situations that appear without realizing it, in a totally unexpected way, should be considered by any individual who wishes to have a good management of their personal finances, a subject of "High importance ”.

But why is it listed as “High Importance”?

In our life, at some point we will have to be in a position where we do not want to be, and where the disbursement of money or monetary expenses cannot be postponed for any reason. For example, an extreme situation such as an accident that leads to serious health.

By not having enough money, what remains is to "ask for a loan." The loans, although they get us out of trouble, when we get out of the difficulty they become a headache, paying it sometimes is not so easy, and not counting how intricate it is to accept a loan for some cases.

And how do we avoid such risky or painful situations? With the emergency fund. Having it gives a guarantee, a margin of time so that you do not come down economically and go bankrupt or fall into bankruptcy in a heartbeat.

What is an emergency fund?

It should not be something complicated to understand, since, with the same denomination with which we refer to it, it seems to be enough. But it is normal that many people are confused about what an emergency fund includes and what it means. It refers to that amount of money kept in an account other than the one used regularly, strictly arranged only for unusual situations, those that would give us a 180 degree turn in our personal or family finances.

First of all, we must have stipulated what it would be for us to have an emergency fund. Some of these calamities can be:

Diseases, accidents, urgent repairs, unexpected dismissal.

Although, of course, you can see more variations of what can be considered an emergency that cannot be postponed. Now, what we should highlight in red, are the things that are not considered to pay or cover with the emergency fund.

What is NOT an emergency fund?

We cannot add expenses of low or medium relevance as possible reasons for payments in an emergency fund, we can say that some situations resemble what a person may consider an emergency. You must see clearly what an extreme urgency is, and not spend that accumulated money on something that will leave you without your security.

An emergency fund is not : for vacations, to buy a car, to cover end-of-month expenses for not having managed your money in a good way, nor to pay for your children's university or others.

Everything must have an exact purpose, so that your activity and tranquility of assets considered to support you are protected, and you do not suffer calamities that generate suffering, stress, depression or other psychological symptoms, which would give you problems to see life with serenity.

We are not saying that if you take these situations as a serious mishap you are totally wrong, but it is recommended to always ask yourself: Is this really an emergency?

Why have an emergency fund?

Financial security, it gives you a cushion that will protect you from the risks of having to pay, something that cannot be covered with your regular income. There are no reasons not to create your own emergency fund. You do it for yourself and yours, having it with you is taking care of your money, and also taking care of each person who depends on you.

And if the calamity persists, well, in the same way it gives you a margin of time to solve it, and in those moments what is needed is something quick to obtain, it is always more convenient that you cover those unforeseen expenses that you have to resort to. to lenders who then leave you a debt with interest. That is, looking at it differently, having that fund gives you some financial freedom.

How to create an emergency fund?

First, you must know how many are your monthly expenses. A person living alone will not have the expenses of a married person with children, and mortgage debts. Then, the money that you will put in your emergency fund will depend on all the expenses that you have stipulated for a month.

Ordering yourself is essential, so this information can be placed in an Excel sheet, with other specifications, and get the exact total of money or at least an approximate one. This will lead to building a savings goal.

The savings goal, it is recommended that it be with a value of 3 months to 6 months of your expenses in a month. But, if you like to play it safe, put the total of 1 full year in your fund. Being able to save until you reach your goal, with a part of your regular income, is the task that you must achieve.

We recommend that your fund be in a different account than the one you use frequently, or in a place that achieves liquidity and the ease of withdrawing it as quickly as you need it without charging you a commission for it.

Emergency Fund Invest it? No!

It's best not to risk it, even though many people consider investing in safe stocks, such as a savings account. What is sought in an emergency fund is not to make the money profitable.