Four Tips for Preparing an Ideal Emergency Fund

four tips for preparing an ideal emergency fund | The challenging economic situation caused by the COVID-19 pandemic crisis appears to persist due to the conflict between Russia and Ukraine. This geopolitical dynamic has led to a significant global inflation increase. Moreover, economic growth has not fully recovered from the pandemic. Basic necessities have skyrocketed in price, with some essential food items becoming scarce and disappearing from the market. We don't know how long this situation will last.

The results of the Organization for Economic Co-operation and Development (OECD) survey in the 2020 OECD/INFE International Survey of Adult Financial Literacy show that nearly half of the world's population (46%) can only survive for a week in a crisis. While 18% can endure for a month, 5.8% can last for three months, and 8.6% can endure for more than six months. The remaining 21.6% admit they don't know. So, what should we do to be able to endure? One of the most crucial things to maintain is having an emergency fund.

Four Tips for Preparing an Ideal Emergency Fund

What is an emergency fund?

An emergency fund is a reserve of money that can be used to cover expenses during a specific period without any income or without having to borrow money during a crisis. This is because during a crisis, we have to face uncertain circumstances. No one can predict when a pandemic or war will end. Furthermore, crises trigger price increases and higher living costs while income decreases.

This is where the presence of an ideal emergency fund becomes extremely important. An ideal emergency fund can be used until we find a solution to restore our income.

How much is the ideal emergency fund needed?

The size of the emergency fund depends on your circumstances and the number of dependents you have. The benchmark is not how much money you have but how many times your regular monthly expenses you can cover. Since everyone's situation and needs can be different, to calculate your emergency fund requirements, you need to review your monthly expense records.

Financial planners typically provide four tips for calculating the ideal emergency fund as follows:

Single: 3-4 times your monthly regular expenses. The assumption is that if you have no income, you can still maintain your lifestyle for the next 3 to 4 months.
Married without children: 6 times your monthly regular expenses.
Married with one child: 9 times your monthly regular expenses.
Married with two children: 12 times your monthly regular expenses.

Steps to prepare an emergency fund

We all have many needs, but resources are limited. Building an ideal emergency fund is important to ensure you feel secure even in prolonged crisis conditions. So, how can you start preparing your emergency fund? Follow these tips:

1. Do a financial check-up:
Building an ideal emergency fund is not easy, but it can still be done. The first thing to do is a financial check-up, which includes:

Income: Has it increased or decreased? By how much?
Expenses: Compare your expenses with previous months.
Debt repayments: Are you still making your repayments on time? Will you likely encounter difficulties in the future?
Insurance: Is your insurance in good standing, and are premiums paid on time?
Bills: Are there any bills affected by your current situation?

The results of the financial check-up will give you an overview of how healthy and strong your finances are. With this information, you can better assess your ability to create a financial plan and prepare your emergency fund promptly.

2. Plan gradually:

After you know the ideal emergency fund amount, you can build it gradually. If you have extra income, allocate more to your emergency fund. Don't worry if the increase is small but consistent. As long as you remain consistent, you'll eventually reach your ideal emergency fund goal.

3. Separate accounts:

The account you use for your emergency fund should be easily accessible and have a quick withdrawal process. You can use a regular savings account, a certificate of deposit (CD), a money market fund, or even precious metals. Each of these has different characteristics, so you need to allocate them carefully, determining the percentage for each.

It's a good idea to keep your emergency fund account separate from your daily spending account to ensure that your emergency fund remains untouched, and you can clearly track your progress toward your emergency fund target.

4. Include it in your budget:

Include your emergency fund savings in your monthly budget. Determine the amount you'll save each month and deposit it at the beginning of the month. If you find yourself with leftover money for spending, consider allocating it to your dedicated emergency fund account.

5. Discipline:

Once again, building an emergency fund to reach an ideal amount is not an easy task. Without discipline, it may seem impossible to achieve. Especially considering that emergency funds should not be used haphazardly. However, this is the essence of an emergency fund's purpose. If it is not used, it means our lives are going well. Hope that your emergency fund remains untouched.

It is crucial to start preparing an ideal emergency fund now. Begin by following the tips mentioned above so that we can survive until the end of a crisis, and hopefully, we will always be given the strength to face any situation.