24.09.2020

How Much Money Do You Have to Save to Make an Emergency Fund?

An emergency fund is a basic pillar in the personal finances of any person. The health of your finances depends largely on it.

If you save to increase your financial security and then invest your savings to advance your financial freedom, before, you have to have created an emergency fund to protect you from unforeseen expenses. A piggy bank from which to throw without having to undo the position in any of your investments or without having to borrow.

But many times, doubts arise. How much do you have to save to create an emergency fund? Where do I have to save money from my emergency fund?

To calculate the amount appropriate to your personal situation, the first thing you have to do is take a look at your expenses. What do you not keep an accounting of your personal finances? Start here. I leave you a free Excel template to keep your home accounting.

If you keep an accounting of your domestic economy, you will know quite precisely what your critical monthly expenses are and their amounts on average. To estimate the amount you must save in your personal emergency fund, you have to multiply by six those fixed monthly expenses.

Some financial advisors talk about an amount that covers expenses between 3 and 6 months, but I always recommend a minimum of 6 months. What expenses to add?

You have to take into account the average budget destined to pay the rent or the mortgage fee, the expenses of food, transportation, or fuel. The expenses of basic household services, such as water, electricity, gas, internet, and telephone. Health expenses, if you have, for example, private medical insurance, you need to go to a physio regularly, etc. And other basic expenses of a personal nature, which are indispensable and that you would have to pay every month, to keep your basic needs covered.

You do not have to add or take into account the budget of your family economy for travel and vacations, leisure and entertainment expenses, purchases of unnecessary clothing, dinners in restaurants with friends, etc. Everything that you can do without in case of financial catastrophe or an unplanned dismissal.

You decide if you decide to save more for your emergency fund and leave in a safe place, a larger amount of money. In principle, I do not recommend it. With having six months of your critical expenses covered, it is enough. But it is also true that we must take into account the situations that can occur and the different scenarios.

In the case of recession, the unemployment rate increases. If you work in an industry that is sensitive to the economic cycle or that easily adapts its human capital based on the economic situation, you are more likely to lose your job and take longer to relocate. Given this factor, you can decide to save a little more money, to spend a little more time without stress.

But leaving a lot of idle money is not recommended either, because the money in your emergency fund loses purchasing power over time. And ballast the global profitability of all your savings.

Ideally, the money in your emergency fund is in a separate account from the day-to-day expenses. From which you cannot easily withdraw money with a card and in an account or deposit in which you cannot direct charges. It is the only way to maintain discipline and not be tempted not to respect the savings compartments of your assets.

Since the emergency fund is money that you have to save to meet unforeseen events or gain extra time to survive, if your main source of income ceases, you cannot put this money at risk.

A paid savings account, a savings plan, or a deposit for a maximum period of one year or more if it is cancellable without penalty, can be good places to leave this amount of money parked. There are also insurance products that may be worthwhile for this purpose, such as savings insurance, etc. The fundamental thing is that it is accessible when you need it.

Do not expect much profitability. Not even beat inflation. It is not the idea. It is simply to protect a part of your savings that you do not want to risk, to gain financial security.

It is not advisable to mix this money in other accounts with other savings. I recommend that you be rigorous if you want to take it seriously.

Do you think you cannot save enough to cover what is necessary with your emergency fund? Well, don’t panic. Something is better than nothing. The important thing is that you start saving as soon as possible, even if they are small amounts — for example, € 30 per month. You will go up with time. Don’t despair. The habit is more important. Most of us do not know how to save.

Start separating little by little and on a regular basis, until you reach your goal. From there, you can save for other goals, in which you can take a little more risk in order to obtain a higher return.