Why You Need An Emergency Fund
When unexpected changes occur, it’s necessary to be prepared to face them and minimize the negative effects on our investments and on our lives. The options to protect against these changes range from contracting insurance to having liquid investments that allow us to have money in case you need it.
Emergency funds are tools that can give us peace of mind in an unexpected situation, such as loss of employment, illness, accident, or loss of a relative. A few things you should take into consideration:
Amount of fund
Many people wonder how much money they should have available for an emergency. The amount varies depending on the risk profile, how prone you are to sudden changes, your lifestyle, income level, job stability and the degree of liquidity you’d need to achieve without compromising your investments.
Although there is no universal answer to this question, you may consider accumulating an amount of money equivalent to at least 3 months of your basic expenses such as: mortgage, services, medical insurance fees, school fees, transportation, food expenses etc… This will allow you to have peace of mind in case you lose your job and have that financial mattress to face the next few months until you get a new source of income.
It should be 6 months to 1 year if you are an independent worker, entrepreneur,a musician or if you’re engaged in a high-risk profession.
While calculating this fund for many people may be a considerable amount, you should gradually accumulate the target amount until you reach the goal.
Where to put it
This fund must be liquid, that is, it must be placed in instruments that guarantee availability when necessary. It must provide security. Put it in financial instruments with volatility, and that are protected from inflation if possible.
This fund will allow you to achieve peace and security in order to maintain the quality of life you deserve while you go through tough times. We hope you can start building your emergency fund and continue on your path to improving your finances.