When life changes occur because we have decided and planned our personal finance and investment plan helps us to succeed in them. But when unexpected changes occur, we must be prepared to face and minimize the negative effects on our investments and our lives. Options to protect against these changes will have to buy insurance from liquid solvents and investments that allow us to have money if needed.
The emergency fund is a tool that can give us peace of mind in a moment or unexpected situation, such as job loss, illness, accident or bereavement, to natural disasters or any situation without warning that we need to cover.
Usually in these situations, when we do not take the respective forecasts of the case, we are in need of making inefficient decisions to address such emergency, such as selling our vehicle, use the educational background of our son, quickly sell an asset at a discount or even incur in borrowing.
That is why personal finance, the emergency fund is particularly important, and this should be a fundamental part of our planning. When you create it, you must consider the following:
Amount of fund
Many people wonder how much money should be available for emergency. The amount varies depending on the risk profile, how likely you are to sudden changes in your lifestyle, income level, employment and stability of the degree of liquidity that you can achieve without compromising your investments. Although there is no universal answer to this question, you can consider accumulating an amount of money equivalent to several periods of your basic expenses, which consist of: mortgage, utilities, health insurance premiums, monthly school payment, transportation, food costs, and loan payments, among other necessary expenses.
- Your background should be 3 to 6 months of your basic expenses, if you depend on a stable fixed income. This allows you to have peace of mind in the event of job loss and have that financial cushion to face the coming months to get a new source of revenue.
- It should be 6 months to 1 year, if you’re independent, enterprising worker or you do a particular activity, for example, have own business, you’re a high performance athlete and live that, you’re an artist, musician or even you do a highly specialized or high-risk profession. This fund will allow you, to have between six months of mattress to re-define the strategies of your business or you even will be one year old to prepare yourself in another professional area to be able to use you or to initiate another activity.
While calculating this fund for many people can be a considerable amount, it is advisable to go slowly accumulating the target amount to meet the goal.
Where to place the background
This fund should be liquid, i.e., are placed in instruments to ensure availability of data at the time it is needed, such as financial assets.
You must provide security. Put it in low volatility instruments additionally must provide profitability to maintain purchasing power, i.e., must protect from inflation. To do this, you should consider basic principle of diversification: not put all your eggs in one basket.
In countries with instability in its currency, it is advisable – to the extent of your possibilities, at least one part of emergency fund is invested in foreign currency.
Significantly, this emergency fund does not displace or replace the insurance plan are two parallel and fundamental tools in financial plan.
This fund will allow you to achieve peace and security to maintain the quality of life you deserve. We hope you can start building your emergency fund and continue your way to improving your finances.