Emergency fund – What is it, definition and concept | 2022

Therefore, we are facing a mattress that would allow us to deal with those expenses that arise without warning. Of course, whenever they are necessary, not for the holidays. On the other hand, these amounts are very high, for example, a major car repair.

In this way, we will save certain amounts of money to be able to face them when they arise. In addition, the fund must be studied in detail and take into account all possibilities. While we cannot accurately predict the future, we can at least minimize risk.

Characteristics of an emergency fund

There are many reasons to create an emergency fund. We will focus on the most relevant ones, which, in turn, are related to their advantages.

  • Promotes the culture of saving: Money, from its origin, fulfills two essential functions. One is to allow the buying or selling of goods and services. The other is storage (savings) for the future.
  • Allows you to have a savings plan: Related to the previous one, another feature is that we can establish certain savings goals and do so in an orderly manner.
  • offers peace of mind: Any problem arises and we know that, at least, we will be able to deal with it more successfully thanks to this financial fund.
  • Liquidity: It is important that you have full liquidity and that we restore them again when we use it for contingencies.
  • Protection: Finally, we can mention the protection it offers against a bad personal or business decision, not taken in a crazy way, but unexpected.
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Differences with the contingency fund

There is a similar figure that is the contingency fund. Both may seem the same, but there are differences that we must take into account. These have to do, above all, with the expected final monetary amount.

A contingency is something that can happen that is related to small expenses. For example, the bill from the vet. However, the emergency refers to expenses of greater magnitude, for example, a mattress if you lose your job.

Process for creating an emergency fund

Let’s see what are the steps to follow to create a fund of this type.

  • First of all, the budget. Here is an unwritten rule that can serve as a reference at first. It consists of managing to save, in a certain period of time, between three and six times the salary we receive each month.
  • Second, a financial plan. Of course, let’s remember that the fund must have total liquidity, therefore, if we expect profitability, we have to take into account that it will be low. Thus, we will not be able to benefit greatly from the magic of compound interest to have an amount much greater than what we save.
  • Thirdly, linking with the previous one, we must carry out a study of our savings plan. We must know how much money we must transfer to the fund and how long it will take for us to have the desired amount. Let us remember that there will surely be no interest, unless we invest in savings products.
  • Finally, we open a bank account for the emergency fund. Even if we have the option to have accounts without commissions, we can open one for the emergency and another for the contingency.
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Emergency Fund Example

Let’s see, finally, an example of a savings system of this type. It is simple, but for practical purposes we believe that it is sufficient. Let’s imagine that we want to create a financial cushion in three years for an uncertain future, let’s see how.

Emergency Fund 1

From left to right appears the monthly salary (in monetary units), the total if we opt for an emergency fund of three times that salary or six. Then, the time in months and the monthly fees for each option (50 or 100), as totals divided by the time in days.

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