Emergency Fund: Definition, Function, How to Calculate, and Saving Tips

financialtreat – will explain about Emergency Fund: Definition, Function, How to Calculate, and Saving Tips that you will get in the following article. Let’s look at this article carefully!

The ideal financial condition is what keeps us safe under any conditions. Even so, we cannot avoid things happening beyond our expectations and require more costs than the budget we have prepared. This is the function of an emergency fund, as a fund that is available and easy to take at any time when you need it immediately in urgent conditions.

An emergency fund is a collection of money in a certain amount that is easily disbursed and accessed when you are in an emergency and should not be mixed with other funds. This time we will discuss emergency funds more fully, including how to calculate and also save them so that they can be collected quickly.

Difference between Emergency Fund VS Investment

Many mistakenly assume that an emergency fund is the same as an investment or that an emergency fund can be used for investment. In fact, the two have different functions. Emergency funds are generally in the form of short-term savings that are flexible, must be liquid, and easily disbursed when needed at any time and prepared specifically for certain purposes so that they cannot be used for purposes other than when facing emergencies.

Meanwhile, investments usually have a more specific purpose and the time of use of funds can also be measured, whether it is 6, 12, or even 24 months. Then save investments periodically obtaine from a percentage of income.

Regarding emergency funds vs. investments is still much debat because many are afraid of spending too much money on the post. This financial post is mandatory, fix, and amounts to a lot while investing is a good choice if you already have cold money or money that is not use in the near future.

Emergency Fund Function

Broadly speaking, emergency funds serve as funds that we need in emergencies or urgent conditions and cannot be overcome with our regular funds. Here is the full description of the emergency fund function:

1. For The Cost of Treatment when Sick

Disasters that come can take various forms, one of which is when sick or in an accident. Of them we cannot predict when it occurs, therefore it is very important to be on guard with a special financial post for emergency events. Moreover, there could be hospital bills that cannot be cover by the health insurance you have.

2. As a Backup When Losing Your Job

Work is also an uncertain thing because there is no guarantee you will be employe for life in a company. It could be due to poor company performance (bankruptcy) or unintentional mistakes could be the reason you have to quit your job or off.

The example above shows the importance of having a reserve fund post that can be a “handle” as long as you don’t have a regular income because you are looking for a new job. Your financial condition will be maintaine safely until you get a job again.

3. Serves to Repair Personal Assets

One other emergency thing that we may not have thought of is personal assets that can be damage at any time. We can never be sure the condition of our personal assets is always in good condition. For example, a cell phone that suddenly breaks down, a car breaks down and requires major service or damage to some parts of the house that must be repair immediately.

These conditions may occur outside of your calculations. Therefore, start setting aside income to collect reserve funds in order to overcome the problem.

4. To Avoid Debt

Have you ever experience a salary condition that runs out in the middle of the month because of unexpect expenses? When you don’t have savings or an emergency fund, you will usually borrow some money to be able to meet daily needs or bills that are important. You can borrow using a credit card or from relatives. An emergency fund prevents you from going into debt.

How to Calculate An Emergency Fund

If you are just starting to raise emergency funds, maybe you will be confuse about having to set aside funds for how many times the monthly salary. The amount of funds you need depends on the amount of regular monthly expenses. In addition, it is also influence by the status and also the number of dependents in the financial budget. Here’s the full explanation:

1. How to Calculate Calculating Emergency Funds for Singles

The number of funds for those of you who are unmarry, single or single, and have no dependents, must have at least an emergency fund of 6 times the amount of regular monthly expenses. For example, if every month your expenses reach Rp3 million, then the funds you must set aside amount to Rp18 million. If at any time your monthly income source stops, then this emergency reserve fund you can use temporarily to meet your daily needs to get new income.

2. How to Calculate Calculating Emergency Funds for Married Couples

For those of you who are married but do not have children, the funds you need for the family are at least 9 times the amount of monthly household expenses. For example, your expenses every month reach Rp5 million, multiply by 9 then the funds for the ideal needs to be prepare is Rp45 million.

3. How to Calculate Calculating Emergency Funds for Married Couples with Children

Then, how to calculate the emergency fund for families who have 1 child or more? Of course, the number of funds need will be more, which is at least 12 times the amount of household monthly expenses. For example, your household’s monthly expenses reach Rp7 million, multiply it by 12 then the total amount of funds you need to set aside is Rp84 million.

Tips for Saving an Emergency Fund

How long can we raise the emergency funds we need? Whether or not it lasts depends on how to save and how to manage your finances. If the way you do it is right and right, it usually doesn’t take long enough. Here are the best tips for raising an emergency reserve fund, especially for those of you who have never done so:

1. Check Current Financial Condition

Our current financial condition will determine how much money you can set aside. Calculate the amount of your income and expenses each month. Or getting use to recording cash flow and also designing a monthly budget is also very helpful.

2. Create The Required Fund Target

From how to calculate what has been discuss above, you must have known the number of funds you need to prepare. From there, you can make the target funds need. Or do predictive calculations for things that may happen later, for example, the cost of repairing a car reaches Rp3 million or home losses due to floods of Rp5 million. At least in one month, you should set aside 5-10 percent of your total income to get into the emergency financial post.

3. Open a Special Account

Maybe you don’t know where the emergency reserve fund is good to keep. Unlike savings, emergency funds should be kept in a new account separate from routine monthly expenses. The goal is that you are not distract to finance other needs.

Also, consider choosing an account that does not require a large initial balance when you first open an account and does not charge too large a monthly administration fee. You must also have quick and easy access so as not to have difficulty using the money in the event of an emergency, for example, mobile banking is available.

4. Start Collecting Slowly

It could be that you are quite surpris to see the number of emergency funds you need to prepare. But there is no need to worry because collecting emergency reserve funds can be start slowly like being paid in installments and not immediately putting large funds. This amount of money will definitely be collect as long as you remain routine and consistent to set aside money every month.

5. Directly Allocate when Payday

Never delay to set aside money for this financial post so that it is quickly collect and unuse. On the first day, you get income, immediately separate the emergency fund by about 20 percent. The other 80 percent you can use for other monthly expenses.

6. Press Consumptive Expenditure

Reducing consumptive spending is very important, namely for things that are actually not too urgent or you may not need. You can also get around it by looking for a replacement that costs less but offers the same functionality and quality.

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7. Find Additional Income

In addition to setting aside money, you can also find additional income as a new source of income for emergency funds. For example, by doing business, investing, or being a freelancer. Take advantage of the skills you have to generate income outside of the main job.

The procurement of emergency funds in our financial budget is a very important thing and must be done by everyone. Manage finances wisely and prepare an emergency fund from now on with high discipline and commitment, so that you can be ready for any emergency that can occur at any time. Especially in the midst of the current Covid-19 pandemic conditions, which are increasingly unclear when economic conditions will improve. Good luck!

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