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| The Importance of Having an Emergency Fund |
Who is still often confused when there is a danger that attacks their financial account? Maybe you don't understand the concept of preparing an emergency fund. Let's learn in this article
The Covid-19 pandemic that hit the world in 2020 is still clearly remembered, not only impacting the health sector, but also in various other sectors, ranging from education, social, to economic.
Conditions that were never imagined before, we inevitably have to go through. To survive in these conditions, many companies and entrepreneurs have been forced to close their businesses, or lay off employees to survive in the midst of the pandemic situation.
The Covid-19 pandemic is not the only condition beyond our control that has an impact on our lives, there are many things beyond our control that we have to face, whether we like it or not, especially those that have an impact on our financial condition.
So how do we deal with these conditions?
In financial planning, we know the stages of financial management, starting from cash flow planning and emergency funds, protection, investment, retirement funds, and inheritance planning.
This time we will discuss the first stage of financial planning, namely cash flow planning and emergency funds. Why is cash flow planning and emergency funds the initial foundation in the stages of financial management?
Managing finances can be likened to building stairs, we need strong footing at every step, especially in our first step, namely cash flow and emergency funds. Positive cash flow is a condition where our expenses are not greater than our income, which means we are able to meet our expenses from the income we have.
Meanwhile, emergency funds are a sum of funds that need to be provided to meet needs and can only be used in emergency conditions. In addition, by having an emergency fund, we become more prepared and safe when faced with the worst conditions.
Emergency conditions can happen to anyone, both single and married individuals, therefore, everyone must have an emergency fund. In addition, emergency conditions occur without us ever planning or expecting them. Here are some conditions that are included in emergency conditions:
1. Sick
Everyone has been sick, but no one knows when we will be sick, emergency funds can be used when we are sick for medical needs, until the recovery process. Moreover, when we are sick we cannot earn income to meet our needs, so emergency funds can be used to replace the loss of income when we are sick.
2. Loss of source of income
Not only during the Covid-19 pandemic, changes in economic and industrial conditions have caused many companies to eventually have to switch their businesses and also stop operating, so that many workers have been forced to lose their source of income.
3. Vehicle damage
Vehicles used as a means of mobility to earn a living are very important tools to help us do our activities. However, it is undeniable that there are also many things that we cannot avoid, such as flat tires, broken down vehicles, or needing repairs.
4. House damage
Unpredictable damage to the house such as leaking roofs, broken water pipes, and all functional house damage that requires immediate repair. Not including those that are aesthetic, such as renovations to make it look more aesthetic.
5. Damage to household appliances
Some household appliances such as washing machines, stoves, air conditioners and others, when damaged, will have an impact on the needs of the family at home, so they need to be repaired immediately, or replaced with new ones, so that the family's needs can be met again.
6. Disasters
Of course we never know when disasters will occur, whether floods, earthquakes, landslides, fires, and others. Emergency funds are needed to meet our living needs, and as provisions for us to reorganize our lives. How much emergency funds should each person have?
Why do we need to prepare emergency funds between 3 - 12 times monthly expenses?
We will take an example when a single person is laid off, and no longer has a regular income like before, and needs time to get a job again, then by having an emergency fund of 3 times monthly expenses, he can still meet his living needs for the next 3 months, until he gets a job to return to generating regular income.
Emergency funds must be collected as soon as possible, because emergency conditions can never be predicted when they will occur, so when an emergency occurs, we must have provided these funds. Here are some tips that you can do to collect emergency funds:
You can start to record your finances, how much income and how much expenses you have each month.
1. Start making a budget, both for routine needs, savings, and investments
2. Determine the target amount of emergency funds needed by PINA friends
3. Determine how long the emergency fund amount can be achieved.
4. Separate emergency funds from other routine needs and investment accounts.
5. Collecting emergency funds does take time, do it slowly and consistently. If along the way there are many emergency conditions that cause the emergency funds that have been collected to be used, then you can immediately refill the emergency fund account.
6. You can also make emergency funds the main priority of the financial goals you want to achieve
7. Reallocate consumptive spending items to accelerate meeting emergency fund needs.
8. You can consult a financial planner to allocate finances in order to have emergency funds and plan your finances.
Because of its nature that must be quickly available when needed, emergency funds must be stored in financial instruments that are easily accessible, easy to liquidate, safe and low-risk, such as savings, money market mutual funds, and others, so that the funds needed are available and stable in nominal value, not affected by external conditions such as when we invest in stocks, P2P, or Crypto.
You guys, when we can prepare ourselves to be more prepared to face emergency conditions from a financial perspective by having an ideal emergency fund, then we have made an effort to reduce the risk of debt, take care of loved ones who are in our responsibility, and ensure that our financial goals can still be realized.
If you find it difficult to plan your finances, you can contact and consult a financial planner. I believe that planning and managing finances well is a form of gratitude and responsibility for ourselves, our families and especially to Him who has given us sustenance.
Hopefully this article is useful and helps you to prepare emergency funds.