What is an emergency fund and what is it for?

An unexpected situation might require a huge expense of our money. If you have an emergency fund, you will have fewer things to worry about.

To have savings is one of the main goals within personal finances and it should be a part of our monthly budgeting process. We save money to acquired goods but there is one thing that sometimes is not taking care of: saving money for emergencies.

What is an emergency fund?

An emergency fund is money that remains untouched in a bank account until a special occasion arises in which a high amount of money is required immediately. Its use is a consequence of an unexpected situation: spends around health issues, home reparations that are not planned, or car repairmen. It implies all those things that haven’t been included inside our monthly budget because they come out of nowhere.

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Why emergency funds are so important?

Just by having money on the side, people gain safety. This money used only in case of an emergency prevents you to use money from your bank account that has other destination, such as regular spendings (supermarket, insurance, services). Through having this money saved, you will be able to have better management of any situation that presents itself that was unknown previously but that you can not help but do something about due to the nature of it.

For example, you can’t predict a sudden health problem and, even though you have insurance, it is most likely that you will have a few extras spends that aren’t covered and it requires having money available at that moment to take care of it.

Also, it helps to have better financial management because it allows you to maintain those goals established within the budget, despite the situation you might have to face in any given month.

How to prepare an emergency fund?

To create an emergency fund, you must start by including it in your monthly budget as another long-term goal such as buying a house or cancel a debt.

1-Each month, make sure to set aside a part of your income for your emergency fund. Having this money on a separate account to the one you use for your daily spendings might be helpful to avoid the temptation of using this money for other things.

2-Have a maximum limit that you would like to reach as your emergency fund, taking into account your income, the number of people that are part of your family and, your lifestyle. It should be good enough so you feel safe during the worst-case scenario that you can think of regarding spends.

3-Point out what situation could mean an emergency for you. You must maintain clarity on what means something unexpected and the immediate response it would require from you. Some things can wait and some others can’t, so you know better than anyone how to use this fund.

4-If you have to use the emergency fund, do not forget to replenish that money. You might want to increase the maximum you had established before o keep it the same way, either way, you can’t neglect it.

Even if you start with a few cents, the important thing is to start saving for it!

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