How to Calculate Emergency Fund: Complete with Tips!

How to Calculate Emergency Fund – Have you set up an emergency fund? Before we discuss further, what is an emergency fund? An emergency fund is money that must be saved so that it can be used in unforeseen situations. These funds should not be used to meet daily expenses and basic needs, should only be used when we really need them.

Having an emergency fund should be a priority for everyone. Get into the habit of setting aside money for the emergency fund sector into your monthly financial plan. With an emergency fund, you can rest easy because you have a plan and spare money. In addition, you also avoid debt or emergency loans if an unexpected emergency occurs.

Then, what are examples of permitted use of emergency funds? Emergency funds may be used for unforeseen and emergency expenses, such as unexpected medical expenses, home or vehicle repairs, and when you lose your job.  Here's how to calculate an emergency fund that you need to know.

How to Calculate Emergency Fund

Ideally, how much emergency fund should be saved so that our finances are safe? In fact, it is difficult to determine the ideal amount because everyone has different income and needs. One thing is for sure, the bigger the emergency fund, the smaller the risk factor.

Some sources say that ideally you have an emergency fund of 3-6x your monthly income. For example, if you have an income of IDR 5,000,000 per month, then you should have an emergency fund of IDR 15,000,000 to IDR 30,000,000.

Please follow the steps below to make it easier for you to determine the amount of emergency funds needed.

1. Create a Monthly Expenditure Plan

The first step you have to do is make a monthly spending plan every month. In this way, you can find out how much income and expenses you have. Once you know how much you need to pay for the basic costs, you can set aside the remaining money to be allocated to an emergency fund.

2. Set Amount for Emergency Fund

Once you know how much money you can allocate for an emergency fund, set the amount and make sure to always set it aside in the coming month. If you have more income, it would be even better if some of it could be allocated to the emergency fund sector. Make sure you separate your emergency funds automatically so you don't forget!

3. Put Emergency Funds First Before Long-Term Investment

Sometimes people are confused whether to make long-term investments first or create an emergency fund first. The answer is to prioritize emergency funds. The reason is because we don't know when an emergency situation will occur, it could happen in the near future. If at that time we still do not have an emergency fund, then our financial situation will experience difficulties.

4. Save an Emergency Fund in What Form?

After determining the amount of emergency funds that need to be set aside, a new question arises, in what form should you save your emergency funds? There are several options that you can consider regarding this. You can save it in liquid funds, savings bank account, short term deposit, or cash.

Each way has its own advantages and disadvantages. If you want to benefit from interest, you can choose to save your emergency fund in a short-term deposit and liquid funds. However, if you want to be practical, you can choose a savings bank account or cash.

5. Never Use an Emergency Fund for Anything Else

Last but not least, never use your emergency fund for anything else. There are many people who make this mistake, they sometimes use emergency funds for important purposes that can still be handled using their regular expenses. Be careful in using an emergency fund, make sure this fund is only used for really important situations.

Also Read: Responding to Children's Curiosity: How?

That's how to calculate an emergency fund, how to determine the amount of an emergency fund, and the important things you should know about emergency funds. I hope this article has helped you in setting up an emergency fund as early as possible.

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