There are many unforeseen events in life that are beyond our control. The expenses that can arise are infinite and also appear most of the time, at the least opportune moments.
Therefore, one of the first tasks we must do on our way to financial planning is to start an emergency fund. An emergency fund is nothing more than a reserve of money to be able to draw on in case of unexpected situations.
Whether we want to or not in our lives, many events can arise that alter our economy, such as a car breakdown, a breakdown of an appliance, a medical expense, the temporary loss of work, etc.
Why an emergency fund?
Unforeseen events occur most of the time at the worst possible time, and if we do not have a fund of money that covers all or part of these expenses, it is normal that we have to resort to more expensive options such as:
1.- Request a loan or pay with a credit card.
Going into debt would increase our fixed expenses that would generate interest on said debt, and we may be forced to accept unfavorable conditions when requesting financing in cases of need.
2.- Having very long-term investments, such as stocks, mutual funds, or even deposits, is of no use.
As a result, market circumstances may not be favorable to us and it may be necessary to sell at a loss in the case of investments in funds or shares, and bear a commission for early cancellation in the case of deposits.
Therefore, although we cannot avoid unforeseen events, having an emergency fund can help alleviate the situations mentioned above.
How much do you have to have in the emergency fund?
It will depend on the personal needs of each one, such as the monthly income we have, the number of people we are in charge of, the monthly expenses we have to face, etc.
For all this, before starting and knowing how much money our emergency fund should have, we should take a pen and paper, and know the fixed monthly income and expenses that make up our economy. And ask yourself, how much money saved would give me some security?
To have a good emergency fund, it would be advisable to have the equivalent of between 6 and 12 months of our fixed monthly expenses. Enough so that in this time interval we have room to create an action plan and solve that unforeseen expense or irregular economic situation.
We hope that our article on family finances has served you, we leave you thinking about your income and fixed expenses.