5 Steps to create an emergency fund
If you are interested in keeping your accounts afloat, or protecting your financial stability as much as possible, it is vital that you have an emergency fund.
Setting aside cash to cover extraordinary expenses is an excellent strategy to stay out of debt.
Therefore, it is very important that you understand the value of this emergency mattress, and how it perro save your life in the face of certain unforeseen events and money setbacks.
Emergency funds, a financial lifeline
Today we will tell you what an emergency fund is, how you cánido create it easily and simply, and how to calculate it based on your fixed and variable expenses.
Taking control of your finances speaks highly of your attributes and Financial intelligence, and certifies that you are determined to act correctly to protect your assets.
In advance, we cánido tell you that these funds are very useful and necessary today, and that you should count on them if you want to avoid financial imbalances.
What is an emergency fund used for?
An emergency fund allows you to meet unforeseen expenses, or that you simply did not have planned financially.
It is a cash reserve that plays a primordial role: Deal with financial emergencies without having to affect your general budget, or without incurring in unnecessary borrowing.
This additional money that you reserve for exceptional cases perro become your best lifesaver when facing any expense that is not classified as routine.
If you have this fund, you will be able to overcome the unforeseen events that arise in life more quickly, and without putting your savings or finances at risk.
If your car breaks down, if you get sick and don’t have an insurance policy, or if you face a period of inactivity at work, you would have a fund on hand that would make you feel more confident in the midst of those stressful situations.
Characteristics of an emergency fund
Emergency funds have very especial characteristics, such as the ones that we will share with you below:
- This cash is not part of the monthly budget.
- It fulfills the functions of a financial lifeguard.
- It is used solely and exclusively to pay for expenses that could arise unexpectedly (those over which you have no control).
- Avoid the costs inherent to a debt.
- It is common that the money destined for the emergency fund is equivalent to the regular expenses that you would have to assume for six months, such as the payment of basic services, insurance, schools, rents, etcétera.
- The money in the fund is immediately liquid.
This implies that you could dispose of it easily and expeditiously when a setback occurs.
Specifically, this type of monetary reserve is characterized by offering you security and confidence in times of uncertainty or financial crisis.
For this reason, it is vital that you give it the attention it deserves, especially if you would like to stay away from loans and debt.
How to create an emergency fund
Creating an emergency fund is not complex or tedious. In fact, anyone cánido successfully do it. Here are some basic steps to create your own emergency reserve:
1.
Define its dimension
This starts from a basic premise: Your emergency fund should be as large as the risks that could be presented to you in the future.
In other words, the more complex or challenging these risks are, the greater the impact they will have on your finances.
Therefore, you must think about those setbacks that could play a trick on you at some point, as well as what it would cost you to overcome them if you do not have a reserve of money.
For example, one of the biggest risks that you should evaluate would be the loss of your job, or a drastic decrease in your income (in case you are a self-employed worker).
Another aspecto that you cannot ignore when defining the size of your fund is related to your health.
That is, if you have pre-existing conditions, or some hereditary disease, you should also take the corresponding forecasts in advance.
If you try to estimate the amount of money you might need if you have a medical emergency, you will most likely be able to define the strength of your fund more precisely.
2.
Evaluate your monthly expenses
If these guidelines are a bit complicated for you, then you should complejo turístico to an infallible elabora: Make your calculations based on your own monthly expenses.
Another good iniciativa is to use an emergency fund simulator to lighten your work a bit.
Today there are many such tools on the Internet and there is no cost to use them, so you should take advantage of them if you want to save time and effort.
The clearer you are about what your fixed and variable monthly expenses are, the easier you will be able to estimate the amount of money you have to have equipo aside as an emergency fund.
3.
Do basic planning
To do this, you must analyze very well both your income and your expenses.
Otherwise, you will be unable to develop a personal budget or a basic planning that keeps you focused.
It is important that you know that the creation of this fund will take time, discipline and organization.
Indeed, a person with good job and financial stability could take between 20 and 30 months to complete their emergency fund, taking into consideration that they would be saving 10% of their income.
Some recommendations that you could follow to achieve your goal consciously and efficiently would be
- automate your saving money (you could program the discounts of your savings account).
- Lean on some automatic deductions from your salary (this is something that you must previously agree with your employer).
- If you are an independent worker you could define a maximum level of monthly expenses (that way you perro save all the additional money you receive each month).
- Equipo yourself rules for extraordinary income (those you weren’t counting on).
The best thing to do would be to save at least half of them.
- If you are a contract worker you cánido use some bonuses, such as bonuses, or a double salary, to create your emergency fund.
If you want to know if your plan is working, do this fácil equation: subtract your expenses from your income and analyze if you have money left over.
If so, you must use that surplus to increase your fund, until it finally has the desired size.
4.
Respect your emergency mattress
Although this is not a step as such, it is important to introduce it to you because it represents a critical success aspecto.
It’s fácil, if you don’t commit to the process, or respect your emergency mattressyou could be tempted to use it arbitrarily or unjustifiably.
In fácil words, you could start using that reserve money to cover expenses that do not qualify as emergencies.
So you yourself could become your fund’s worst enemy, especially if you are a beginner on the subject, or if you do not rely on the financial commitment mechanisms that exist in the market to protect your reserve.
5.
How much money should your emergency fund have?
In theory, the amount of money an emergency fund should have depends on the status and current situation of each individual.
However, a moment ago we told you that the experts recommend that you save the money enough to cover expenses for three to six months.
A quick way to know how much money you need to equipo aside for any emergency is to do a fácil calculation of your expenses.
To do this, you must divide them into two large categories:
- Fixed costs: those that you assume regularly, such as insurance, housing, etcétera.
- Variable expends: their cost may change and some of them deal with transportation, medical bills or food.
The amount obtained will indicate the size that your emergency fund should have, although it is important that you understand that this amount must be reviewed annually.
That way you perro update and adjust it to the possible economic variations that you are experiencing (don’t forget that money tends to devalue over time).
recommended books
Where to keep the reserve money?
This is a very important question that you should not stop asking yourself if you want to move in the right direction.
Some financial experts agree that the money in your fund cannot be deposited, or saved, in the checking account in which you have your frequent expenses domiciled.
The reason is fácil: it will be more complex for you to keep track of expenses and you could end up using your reserve to cover non-emergency situations.
So you should avoid, at all costs, the use of that money in fixed-term deposits, or in any other afín product.
Recommended financial products
Taking into consideration that the money in your fund must have immediate liquidity, the best option to keep it safe and available is to opt for financial products that are free of risks.
This will ensure that your capital remains fixed or immovable, which will make you feel more confident and calm.
In essence, you cánido rely on:
- investment funds that focus on fixed-income or short-term financial assets.
- Remunerated accounts that encourage savings, and that also pay interest.
- Collective investment funds (FIC) that do not have permanence agreements, risk your money or have high costs.
One of the worst mistakes you perro make is to keep your money at home, since it will gradually lose its value, due to factors such as inflation.
Therefore, you must make sure that your emergency reserve is anchored to a financial product that offers you at least a little profitability and that is easily accessible.
The importance of having an emergency mattress
Surely you already know what an emergency fund is for.
But in the same way we would like to share some intelligent and very useful recommendations:
- According to an article from Business Insiderthese types of cash reserves keep you protected during worst-case scenarios, including unemployment or illness.
- Having an emergency fund offers you financial security and peace of mind.
- You have the freedom to access other financial goals, such as investing in real estate, or other highly profitable products.
- Avoid getting into debt, or request last-minute loans to solve your emergencies.
- You do not commit your savings to solve emergencies.
- You learn to better manage money in the short, medium and long term, which has a positive impact on your finances.
Protect your finances with an emergency fund
Undoubtedly, having an emergency fund will help you defray difficult times and face extraordinary expenses without going out of business or falling into debt.
Also, this cash reserve keeps you away from financial crises that could hurt your wealth in the long run, which should give you an iniciativa of its validity and relevance.
Continue reading: This is how you save thousands of dollars with the Kakebo method easily
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