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| Tips for Preparing Emergency Funds According to Financial Planners |
In living our daily lives, we never know when an unexpected event can happen. Therefore, having an emergency fund is a wise step to protect yourself and your family from financial uncertainty.
This article will discuss emergency funds in depth, including the definition, calculation, and tips for creating and maintaining an ideal emergency fund.
What is an Emergency Fund?
An emergency fund is a reserve of money prepared to deal with financial emergencies. These emergencies can come from job loss, accidents, or other unexpected costs.
Emergency funds are designed to provide financial protection and ensure that daily life continues to run smoothly when faced with unexpected situations.
Factors That Affect the Amount of Emergency Funds
There are at least 4 factors that affect the amount of emergency funds, namely:
1. Salary and Monthly Expenses
One of the main factors that affects the amount of emergency funds is salary and monthly expenses. Someone with a higher salary may need to save more because their lifestyle and expenses tend to be higher.
Meanwhile, someone with a lower salary may consider saving a certain percentage of their salary.
2. Financial Dependence
If you have financial dependants such as family or parents who depend on you, the size of your emergency fund should cover their needs as well.
Consider adding an amount sufficient to cover your family's needs in an emergency situation.
3. Job Type and Job Stability
A person with an unstable job or one that is prone to layoffs may need to save more in an emergency fund.
On the other hand, a more stable and secure job may allow someone to have a slightly smaller emergency fund.
4. Health and Insurance
Health is an important factor in determining the size of an emergency fund. If you have health problems or do not have adequate health insurance, you may need to save more to cover unexpected medical expenses.
How Much is the Ideal Emergency Fund?
Determining the ideal emergency fund amount is a crucial step. There are some general guidelines that can help you calculate the right amount:
1. General Guidelines
If you are single, then the emergency fund that you should collect is at least 6 times your monthly income or expenses. If you are married but do not have children, then the emergency fund that you should prepare is 9 times. If you already have children, then the minimum emergency fund is 12 times.
This amount is considered sufficient to cover living expenses for several months in the event of an emergency. This gives someone enough time to recover from an emergency situation and find new sources of income if needed.
For more complete information, you can ask a financial planner exactly how much emergency fund you need to prepare, by looking at your financial condition and needs!
2. Calculating Monthly Expenses
The first step in determining the amount of emergency funds is to calculate your monthly expenses. This includes basic needs such as food, shelter, utilities, transportation, and insurance.
In addition, also add expenses that may be unexpected such as urgent health care costs or sudden repairs.
3. Additional Factors
In addition to general guidelines, additional factors such as work, financial responsibilities, and health also need to be considered.
Someone with an unstable job or large financial dependants may need to save more.
Tips for Preparing Emergency Funds
Some tips for preparing emergency funds that you can do, namely:
1. Prioritize Emergency Funds
Make the formation of emergency funds a top priority in your financial plan. Set aside a portion of your monthly income to be placed in an emergency fund account. Try discussing it with a financial planner.
2. Consistency and Discipline
The main key to preparing emergency funds is consistency. Make a monthly budget and stick to the plan. Avoid digging into emergency funds for non-emergency needs.
3. Use Safe and Liquid Investments
Choose a safe and easily liquidated investment instrument to place emergency funds. Savings or deposit accounts may be the right choice because of their high liquidity.
4. Update Emergency Funds Regularly
Your financial condition and lifestyle can change over time. Therefore, update the amount of emergency funds regularly to reflect changes in your living expenses and financial responsibilities.
5. Consider Insurance
Insurance can be a complement to emergency funds. Make sure you have adequate insurance to protect yourself from risks that may arise, such as health insurance or life insurance.
Emergency Fund Preparation = Important Step
Preparing an emergency fund is an important step in personal financial planning. The ideal emergency fund size varies from person to person, and factors such as salary, financial dependents, and job stability play a major role in determining the amount.
By setting short-term goals, creating a realistic budget, and using safe investments, you can achieve an emergency fund that provides adequate financial protection in the event of an emergency.
Remember that financial planning is a dynamic process, and it is important to regularly review and update your plan as your life changes.