In the financial industry, the term emergency fund is often the subject of conversation. This savings is important for anyone to use in times of financial duress.
Read on to understand more on the importance of an emergency fund.
What is an Emergency Fund?
An emergency fund is an amount of savings you set aside which you can use in times of financial distress. For example, when your phone is broken, you will have to buy a new one because your cell phone is a vital communication tool to communicate with your family and friends and for work. To buy a new cell phone, you can use your emergency fund. Imagine if you have no savings, you will have to borrow money to buy a new phone.
How Much Emergency Fund Should You Have?
First, you need to know what your monthly expenses are and this amount should not include the budget you set aside for investing.
For example, if you have an income of IDR 7 million per month and you invest IDR 2 million, the remaining IDR 5 million is used to meet daily needs. Your monthly expenses are used as the benchmark for the amount of emergency funds you should have.
If you’re currently single, multiply three to six times of your total monthly expenses. This means you must have an emergency fund of at least Rp. 15 million. If you are married and have a family, this amount should be more. You can multiply it by 7 to 12 times. In this case, the minimum emergency fund you must have is IDR 35 million.
When is an Emergency Fund Used?
When can we use emergency funds? Emergency funds should be used when you are facing financial distress. Here are some examples:
- Losing your job
Termination of employment (PHK) is a situaton that can happen to anyone. When this happens, you stop receiving a fixed income every month. In this scenario, you can use your emergency fund to fund your daily needs until you get a new job.
- Repairing your vehicles
When your vehicle has a problem and must be repaired, you can use your emergency funds. Vehicle servicing or repairing is certainly not cheap therefore in this situation, you often have to use your emergency funds.
- Paying for medical fees
Illness or an accident can strike anyone at any time. If you or your family need funds for surgery or other medical treatments, you don’t have to be worried if you can rely on your emergency funds.
5 Tips for Saving Your Emergency Funds
After understanding the importance of an emergency fund and how much you require, you need to start saving to build up your emergency funds. Here are various tips that you can follow to save up for your emergency funds.
- Determine the amount of money you would like to save
Before starting to save up, you need to be aware how much emergency funds you want to save. You can do so by calculating your monthly expenses then multiplying this amount by at least 3 times if you are single so you can survive on your savings for 3 months if you lose your job. If you are married but do not have children, multiply by at least 7 times. If you have children, you must multiply more.
- Save a portion of your income every month
Save a portion of your income every month. The amount you want to save every month depends on your financial condition. You can allocate a minimum of 10% of your salary. The more money you save each month, the faster you can save up for your emergency fund. After receiving your salary, you need to immediately set aside a portion of your income for your emergency fund. This is important so that you do not procrastinate on saving.
- Saving your emergency funds in the bank
You can save your emergency fund in a bank account. When saving money, you need to separate it from the account that you draw down on to meet daily needs. The purpose is to prevent mixing up your spending account from your savings account. If the accounts are combined, there is a possibility that you might end up spending your savings. Separation of the two accounts also makes it easier for you to track the progress of your emergency fund savings.
- Take advantage of short term investments
You can also save up for your emergency funds by investing, especially in short-term investments. By investing in short-term instruments, you can make a profit in less than a year. This helps you meet your emergency fund target more quickly. Some examples of short-term investment options are time deposits, P2P Lending, and mutual funds. You can choose to invest according to your risk profile.
- Don’t make an emergency fund a burden
Some people think saving is hard as the income earned every month is better spent to meet current needs. You should change this mindset. An emergency fund is savings that can be used to meet future needs.
Thanks for tuning in to this article. We’ve covered all the important points you need to learn about emergency funds. Now that you’ve got it all figured out, go ahead and take the steps needed to save up for your own emergency funds on Tokenomy!