Today I want to talk to you about one of the great classics of personal finance: the emergency cash fund.
I will explain to you:
- because it is fundamental ;
- how to set it up;
- in what would amount.
Because as Mike Tyson says :
Everyone has a plan until they are hit with a punch in the face
And when you get an unexpected fine, your car breaks down, you have a trip to make and you have no money… it’s just like getting punched in the face. It’s hard to get up.
If you have let your guard down, you risk being stunned in a corner and falling to the mat.
But you can do it, you just have to get ready for the match. You have to study all possible negative occurrences.
You can’t always run to family and friends or the first financial institution and borrow the money you don’t have.
But let’s go in order!
In this article
- What is an emergency fund?
- How to set up an emergency fund?
- How high should the emergency fund be?
- Because it is important?
What is an emergency fund?
The emergency fund is a ” nest egg” of money to deal with any emergencies, ie unexpected and extraordinary events.
He must therefore save you as a lifesaver in desperate cases.
It should be made up of everyone as soon as they become financially independent.
After forming a family it should be managed on a family level, while as a single it should be managed independently.
How to set up an emergency fund?
The emergency fund can be set up through an initial payment and/or a monthly supply of a current account or a dedicated deposit account.
The account must be difficult to use.
Difficult because otherwise there may be the temptation to withdraw what has been deposited. So I advise you, once opened, to forget about it.
At the same time, however, it must be liquid or easily released.
Obviously, in an emergency, you will not have time to wait for the best moment to liquidate stocks, bonds, funds.
That’s why I recommend a nice deposit account, with a maximum of one constraint (which can be released at any time).
How high should the emergency fund be?
The emergency fund will vary according to your age.
If you are a young person and have just started working, you can settle for 3 / 5,000 Euros.
If you are a family you should have at least 10,000 Euros in this fund.
If you have important insurance coverage (eg for medical expenses), you do not have your car and you have already protected yourself from many risks, you can reduce this amount.
In any case, I am convinced that it is worth exceeding rather than paying the consequences.
Because it is important?
For me, the emergency fund is absolutely important and you cannot do without it.
Many disagree with this statement because they say the money should be invested and circulated quickly.
According to them, the Emergency Fund would be nothing more than fixed capital and waste.
I tell you that obviously in some phases of your life you can also take risks, but most of the time it is important to have the peace of mind of a life preserver ready to help you in cases of difficulty.
I know people who got into debt and were never raised again. I also know many people who have set aside good amounts that allow them to take risks in peace.
In many situations, I felt saved by the sound of the bell or maybe I decided not to compete because I didn’t feel serene.
And you? Do you have an emergency fund?