Financial planning is an extensive board made up of numerous tabs or tools. Some are automatic, they are always among the priority options by default. Others, however, tend to be used more in advanced stages of the process. Among the first, we find the emergency fund. The first thing we must take into account to be able to put one together is its definition and its objective, given that the resource (if it is not properly identified) usually causes confusion.
An emergency fund is closely related to provision and consists of a sum of money with immediate liquid availability of between 6 and 12 full incomes. That is, the total amount (no percentages, little pups or little piles) of money that we receive monthly thanks to our work or entrepreneurship, invested in a tool that prevents its depreciation due to inflation. Put simply and in simple numbers, if a person’s income is $250,000 per month, the emergency fund must be created or built until reaching an availability of between $1,500,000 and $3,000,000. If it is closer to the second figure, even better. At this point, questions always appear.
Above all, these two:
- How do I get to that construction of a semester or a year of income, when what usually happens to me is that I have almost no money left over to give it that purpose?
- How can I ensure that inflation does not liquefy this sum I have earned with effort?
Answers. One way to answer that first and fundamental question is to open a client account in a brokerage company and send 10 percent of the income to an instrument that offers liquidity, although not high profitability, since the two do not go hand in hand. Of course, that six-month or one-year emergency fund will not take that amount of time to build, but rather two or three times longer, depending on the perseverance and rigor with which it is built. Even if 10%, which would be the ideal scenario, seems too much, thinking about a few points less would also be good. The important thing is to give it a start and continuity.
This same process is also what answers the second question. Inflation usually generates doubts, promote strategies to combat it and, as a result, almost always great stress. That same instrument, well chosen, will overcome the obstacles presented by the loss of purchasing value.
Another important point is the destination of the fund. The use of the word “emergency” must be given by a natural framework, which moves in harmony with its meaning. “That is carried out or serves to get out of a situation of trouble or danger” It says, with certainty, the most appropriate meaning in the dictionary. A problem can be having to go through a medical procedure, the breakage of an essential appliance, the loss of functionality of a key tool for our professional task or our daily life, such as a car, for example. There is no emergency in the desire to travel, buy clothes, go to an international recital or treat ourselves. Those desires are fine, they are genuine, but they are another matter and, as such, they must have their independence.
Four benefits of having an emergency fund.
- It is one of the fundamental instruments of all financial planning. Putting it into action is driving an orderly financial life, which will inevitably expand to other instruments.
- Strengthen our order. Through understanding the tools and their function, we will incorporate the culture of planning until the old excuse “I don’t understand anything about finances” disappears from our daily lives.
- It will provide us with the emotional well-being of knowing that we are taking action on the matter, on a path forward. Orderly finances promote harmony and give rest and peace to the mind.
- The emergency fund gives us the peace of mind of knowing that we have an instrument built specifically for an unexpected situation and that, at least in its economic aspect, we are protected.
Gabriela Totaro is ppsychopedagogue and financial educator.
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by Gabriela Totaro
