03.02.2022
WHEN AND WHY WE NEED AN EMERGENCY FUND
No matter how good a budget plan we have, extraordinary expenses are a part of life that is not under our control. They may be related to the need for unexpected repairs, urgent purchase, medical treatment, job loss.
The reasons are various, but the solution is one - to create an "emergency fund" that will protect you from taking (quick) credit. That is why at the very beginning of our working career we should start thinking about setting aside funds for an emergency fund.
What is the emergency fund
The emergency fund is an essential part of our financial protection in unforeseen circumstances. An important factor for any emergency fund is liquidity. You need to be able to get the amount you need as quickly as possible to deal with the situation. One option is to keep money in your home and the other in a bank account. You can make a combination of both, provided you are not tempted to use the cash for other things.
Keeping the amount at home provides us with quick access to funds, but there are security risks. In the event of a natural disaster or robbery, you would not have the fund at the time you need it most. When depositing money in a bank, a high level of protection is ensured at the expense of their liquidity. You need to be sure that you will have access to the funds within 1-2 days, as well as be careful about bank fees.
It should be able to cover your needs for a period of about 6 months. The minimum is 3 months, but the more solid amount you manage to set aside, the calmer you will look to the future. Of course, the amount in this fund should not be too large (for more than 12 months), because uninvested money does not bring profit. As you know, in Bulgaria for a long time now you do not earn interest on savings or current accounts.
How to save for the fund
If you have not saved so far and do not have an emergency fund, now - during the pandemic - it is a very good idea to start. With an emergency fund, you would be more comfortable with inflation and recession, as you will have a "financial cushion". The emergency fund is a buffer between you and life not only in times of crisis, because surprising events can happen at any time and it is good to be prepared for them in advance.
Even if they save regularly for their long-term goals, some people do not envisage this financial buffer in their personal planning and resort to their savings in case of extraordinary expenses. And in this way they move away from achieving the goals they have set for themselves. The other important rule is that the allocation of funds for the emergency fund should be provided before a person directs any savings to investment products.
When you save for an emergency fund, there are no limits on the amounts - you can collect in small installments each month or arbitrarily with different amounts. And if you have had to use your emergency fund, your first goal is to restore it to its original size. If you lose your income and have to live with this money for a long time, try to limit your expenses so that the amount reaches you for as long as possible. In addition, you need to look for a new source of income so that you do not have to resort to loans.
