Building an Inconscious Emergency Fund
From a young age, I developed the habit of setting aside a portion of my income for emergencies. This unconscious practice has provided me with financial tranquility and prevented stress from unexpected expenses. I’ve always disliked overspending and ending up with nothing.
Upon starting my first job, I focused on creating a small reserve despite earning just enough to cover basic needs. This financial cushion has given me great peace of mind.
Using the Emergency Fund
I’ve utilized my emergency fund numerous times for various expenses, such as replacing a car tire, fixing a roof leak, or paying for a medical test. Having this money saved prevented these incidents from causing financial imbalance and forcing me to take loans.
The true value of an emergency fund lies in the stability it provides, translating into tranquility and avoiding the stress of scrambling for funds to cover unforeseen significant expenses.
A Life-Changing Experience
The first time I truly appreciated having an emergency fund was when I lost my job. This situation brings immense uncertainty, as one cannot predict how long it will take to find new employment. Although I had no consumer debts, I was still paying off my mortgage (fortunately, unemployment insurance covered three months of payments).
The company I worked for was responsible and provided me with my full legal severance, recommendation letters, and even a service to assist with job search (outplacement).
Fortunately, I found a new, better-paying job within a few months and didn’t need to touch my emergency fund. Knowing it was there helped me immensely; I searched for a job strategically, patiently, and not desperately.
Another Critical Situation
The second time I was grateful for my emergency fund was when I had a tooth extracted, replaced with an implant and crown. These dental procedures are quite expensive.
Without that money on hand, I would have had to use my credit card, leading to financial consequences and opportunity costs.
Emergency Fund Size: Expert Recommendations
Most experts suggest having at least three months’ worth of family expenses. I generally agree, but each case is unique, and some individuals may need a larger reserve.
For instance, an independent professional with multiple clients but one accounting for 75% of their income. Losing this significant client might take more than three months to replace.
Where to Store the Emergency Fund
The fund should be separate from everyday spending money but readily available (highly liquid). However, it’s also essential to protect its purchasing power as much as possible.
I keep mine in Cetes Directo. In my case, half is in BONDDIA for daily liquidity (at least 90 days of expenses), and the rest is in Cetes with 28-day terms, staggered to ensure weekly access to a quarter of the funds.
This strategy may not be suitable for those just starting to build their fund or who have partially used it. In such cases, complete immediate availability is crucial.
Building the Emergency Fund
Like any long-term goal, building an emergency fund takes time, patience, and discipline. It took me over a year to complete mine.
My advice is to prioritize this fund in your budget and “pay yourself first” until you reach your target.
If you have consumer debts (credit cards, salary loans), prioritize paying those off first. Once they’re settled, redirect that money towards yourself.
Continue building your financial foundation once the emergency fund is complete, setting your sights on other long-term goals and wealth accumulation.
Key Questions and Answers
- Q: How much should be in my emergency fund? A: Most experts recommend having at least three months’ worth of living expenses, but individual needs may vary.
- Q: Where should I store my emergency fund? A: It should be highly liquid but protected from inflation. Consider options like high-yield savings accounts, money market accounts, or short-term CDs.
- Q: How do I build my emergency fund? A: Prioritize it in your budget, pay yourself first, and gradually save until you reach your target.
- Q: What if I have high-interest debts? A: Prioritize paying off these debts, as the interest cost may outweigh the returns from your emergency fund.
- Q: How long will it take to build a solid emergency fund? A: It depends on your income, expenses, and financial discipline. Be patient and persistent.
