Finance experts recommend keeping a good amount of money in the bank account to deal with an emergency. You know why? How much money is enough?
Having a considerable sum of cash available to you in case of an emergency is part of the business strategy of your personal finances. The reason is simple. If you don’t have it and you need it, you would have to go for a quick loan and, normally, that’s a bad deal.
You would get a credit in hours, at a high rate and pay a lot of interest. You could avoid that extra cost if you have contingency savings.
Good traders have a habit of keeping a good amount of cash available. If a business opportunity arises, they will react quickly. Finance experts, and this is categorical, never use the emergency fund to do business. They always have liquid, at hand, cash, cash, in sight.
Because … do you know when the unexpected will occur?
You don’t know, you can’t know.
If the money in the “emergency” fund is invested in land, how long does it take to sell them and have liquidity? If you invested it in a truck, if you lent it to someone, if you took it to enter a business, when will you have the money to handle the emergency?
The fund must be a backup so you don’t lose money or peace of mind . That is the strategy.
How much money should you have for emergencies? How much money should you have in the emergency fund? That is the key question. Having little money is not a good idea, you could fall short for what you need. Having a lot would be a waste. How much is appropriate?
I think you should analyze your particular case.
For example, it is not the same to foresee that you can lose your job in the coming months (the company is making cuts every month) to assume that, at some point, you would have to travel urgently outside the country to resolve a family situation.
You should make assumptions that help you estimate the value of the emergency fund.
You can place yourself in one of these two scenarios:
- Have cash to meet family (or personal) expenses for three to six months.
- Have cash to replace the income of six months.
Exaggerated? No, rather conservative. The strategy, as you can deduce, is that you do not ruin, do not lose money in an emergency case that lasts a day or six months . If you have the fund you will not have to lend money to survive, or to continue paying your bills, and you will not have to sell the car or the house either. Your assets will be safe. It is or is not a good business …
How to build an emergency fund?
If you have a good sum today, you can use it for the fund. Also, you can build it little by little. Save each month a sum, reserve the extra income for the fund until completing the target figure.
You can save the money in a savings account (and keep the debit card on the desk) or in a trust that allows you to have the money in sight; that is, you can make a transfer to your account in minutes. Obviously, having money in a safe, in dollars, in soles, is another option. Choose security.
Finally, like any business, once a year, when you prepare the budget, review the emergency fund strategy and determine the amount you should have.