Creating an emergency fund should be almost an obligation for anyone who wants to maintain the same standard of living regardless of the unforeseen events and financial setbacks that may occur from time to time.
Creating an emergency fund will allow you to have a financial cushion to deal with certain expenses or fines that you were not expecting but that will most likely come your way; it always happens.
In this article I'm going to tell you everything you need to know to create an emergency fund and step by step how to create it.
What is and what is not an emergency?
Remember that your emergency fund should only be set aside for unexpected expenses such as car repairs, major breakdowns at home, medical bills or the unexpected death of a family member. You should make sure that the amount you are saving will be enough to cover at least six months of living expenses.
What should you consider when creating an emergency fund?
There are a few things you should keep in mind when creating an emergency fund. Start by asking yourself these questions:
- How much money will I need?
- How long will it take me to save that amount of money?
- How much risk am I willing to take?
- How much money will I need?
How much money should you save for that emergency fund?
On average, people save between €1,000 and €3,000 for their emergency fund . However, the amount you save depends on your financial situation and individual needs.
To calculate it, it is best to write down in a document the average expenses you have had over the last 3 months. This will give you a good summary of your financial situation and you will know how much money you need to get through the month.
How long will it take me to save that amount of money?
Depending on your financial situation, it may take a few weeks or several months. The time it takes to save the money depends on your financial situation and your individual and family needs.
Ideally, I recommend that you try to save 30% of what you earn . This way, it will take you approximately 7 months to create a 3-month emergency fund.
How much risk are you willing to take with that emergency fund?
You also need to consider how much risk you are willing to take when it comes to saving money.
Are you comfortable with the idea of not having enough money in your emergency fund if something unexpected happens?
If so, you may want to save a little more money each month to have a larger emergency fund on hand.
The maximum amount of time I recommend saving for an emergency fund is 24 months, otherwise inflation will cause you to lose too much money and purchasing power every year.
Therefore, the emergency fund should be sufficient to give us peace of mind but not too large to prevent our savings from being affected by inflation.
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In what cases can you use the emergency fund?
There are some situations in which it is a good idea to draw on your emergency fund to cover unexpected expenses. Here are some examples:
- If the repairs to the car exceed its value.
- If you have medical bills that exceed the cost of your insurance policy.
- If you have to cover unexpected expenses for a family member.
- If you have to deal with the effects of a natural disaster on your home.
If you lose your job and do not want to sell your investments to allow them to continue to appreciate and compound interest to continue to take effect.
Make sure you keep an eye on your budget and bank account so you're always on top of your emergency fund. If something unexpected comes up, you'll be prepared to cover expenses.
Consider hiring a financial coach to help you build and manage your emergency fund. A financial coach can help you identify the right investments for your emergency fund and help you track your spending.
What risks do you run due to the lack of an emergency fund?
Not having an emergency fund can have serious financial consequences. If something unexpected happens, you may not have the funds to cover the costs. This could lead to debt, foreclosure, or even bankruptcy. It's important to understand the risks associated with not having an emergency fund before making the decision to create one .
So, get your act together and take the necessary steps to create a safe and healthy emergency fund.
These measures include actions such as:
- Review your monthly expenses and make necessary adjustments.
- Create a specific account for the emergency fund in a financial institution.
- Create a budget and stick to it.
- Make sure you have access to your emergency fund when needed.
How to create an emergency fund in a bank step by step?
One of the best banks out there to create an emergency fund is MyInvestor.
MyInvestor is an online bank based in Spain and fully regulated by the Central Bank of Spain that offers interest-bearing accounts at 1% annual interest with no fees.
This will allow you, for example, to deposit €15,000 and receive €150 per year in interest without any risk.
Creating a bank account with interest for your emergency fund is the best option you can choose. As soon as you have the money deposited with MyInvestor, the interest will be deposited into your bank account every month. Continuing with the example above, if you have deposited €15,000 each month you will receive €12.50 in interest in your account without having to do anything.
In addition, you can withdraw the money as soon as you want and there are no fees of any kind.
MyInvestor is a bank regulated in Spain by the CNMV, the body responsible for supervising the Spanish stock market. With MyInvestor funds you can safely invest in a multitude of countries, including the United States, and in a multitude of sectors.
