Having an emergency fund is being prepared for a financial unforeseen event. But how much money should this nest egg have and where to keep it?
Have one emergency fund is one of the main recommendations of personal finance specialists to deal with any vicissitudes in life that have a direct impact on the family budget.
Job loss, sudden reduction in income, unexpected expenses such as moving house or car and illness are some of the unforeseen events that can happen in anyone’s life. Having an emergency fund helps minimize the impact of these extraordinary circumstances.
Thus, the importance of having this financial reserve is recognized, but does it know how to set up this fund and what value it should have there?
In reality, the value that we should have for an emergency fund is neither exhaustive nor uniform, it depends on several factors. There are, however, reference values/rates that we can and should follow. Know then all the details.
How much money should you have in your emergency fund?
The emergency fund is an amount of money that is set aside (invested) in order to protect us from any unforeseen event with a financial impact.
More than an investment, it consists of a kind of insurance to avoid debt and to be able to face a drop in income or unforeseen large expenses (which, in reality, are inevitable because we all go through situations like this throughout our lives).
The ideal? The equivalent of 6 months of expenses
The value that we must have in the emergency fund varies from person to person, but to create it we must take into account aspects such as: age, professional and family stability, fixed/variable monthly income, unavoidable fixed monthly costs (such as credit installments, rent, food, household expenses, among others).
However, most personal finance specialists define the need to create an emergency fund based on the amount of salary or monthly expenses (monthly consumption, which is the most consensual and most used parameter), classifying funds, ideally, over a period of three to 12 months.
That is, you must have at least three salaries in your emergency fund or a total of three months of fixed expenses; or the corresponding to six salaries or the total of six months of fixed expenses (best); or the amount corresponding to 12 salaries or the total of 12 months of fixed expenses (the best).
For example, if you have €800 in total monthly expenses, you should have an emergency fund of €2400 (three months), €4800 (six months), or €9600 (12 months). This is the range considered as a reference for resolving and/or adapting to unforeseen situations. More than 12 is not advisable, as the amount must be applied in a more profitable way.
Where to store the emergency fund?
The money channeled into the emergency fund should not be in your checking account, so as not to be tempted to spend it.
You should opt for products with little or no risk, that is, that are easily accessible and without remuneration penalties, early repayment (being able to handle money when an emergency arises) or liquidity. Choose, therefore, to have this financial cushion in a savings accountsince the purpose of this fund is not to generate money, but to be immediately available to meet a need.
Article originally published in July 2019. Last updated in January 2023.