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What is an Emergency Fund? Must Know!

Article
23 Dec 2024

Exploring what is emergency fund reveals a crucial financial safety net for unexpected life events. As demonstrated by the COVID-19 crisis, having savings set aside for emergencies can make the difference between financial stability and hardship. This fund, ideally ranging from 3 to 12 months of salary depending on family status, serves as a financial buffer against unexpected crises like job loss, medical emergencies, or economic downturns.

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COVID-19 is an example of an unexpected phenomenon that seriously impacted the country's economy and society. Who would have predicted that this pandemic would trigger a global monetary crisis? Its impact on the country's economic growth continues to decline, not yet recovered until now (Ayutia Nurita Sari, 2020).

Not many Indonesian citizens were able to survive due to this crisis. Many business people went bankrupt or even fell into poverty due to this pandemic. This phenomenon is one example that life can experience sudden drastic changes. Through this phenomenon, we also need to prepare ourselves in anticipating unexpected things.

One easy way you can do this is by having an emergency fund. Through emergency funds, your life will feel prosperous complemented with good financial conditions. But, what is an emergency fund? Simply put, an emergency fund means you save some money just in case something unwanted happens.

However, unfortunately, many people are still unaware of the importance of emergency funds. In fact, they don't know how much an ideal emergency fund should be.

But, don't worry because the following article will explain the definition of emergency funds to how to calculate the ideal emergency fund specially for you. Let's read the following article further.

Key Takeaways:

  • An emergency fund is a sum of money savings that has been deliberately prepared to anticipate unexpected needs in the future.
  • Financial check-up is the process of checking your current financial condition. This step is quite important because that way you can know how much emergency fund is needed.
  • The most important step before you start collecting emergency funds is opening a special account separate from the account you usually use so that the fund collection process can be monitored well and prevent the use of emergency funds to fulfill your desires.

Understanding Emergency Funds

[Image] source: freepik.com

An emergency fund is a sum of money savings that has been deliberately prepared to anticipate unexpected needs in the future. You can use this emergency fund to cover expenses or meet needs when you have no income without having to go into debt.

Simply put, we can use emergency funds when facing a crisis. For example, like the COVID-19 pandemic crisis, job loss, illness, natural disasters, or even accidents. No human can predict these events accurately. Therefore, it's important for you to immediately collect an ideal emergency fund.

The nominal amount of emergency funds depends on each person's monthly needs and income. Generally, the ideal emergency fund should be at least 3 times monthly salary for those who are not married.

However, if you are married, then the ideal amount of emergency funds is at least 6 times monthly salary. Different if you already have children as dependents, then the ideal emergency fund is 9 to 12 times monthly salary (Sahabat Pegadaian, 2024). You can use this emergency fund to survive up to 3 months ahead after a crisis occurs.

The Importance of Emergency Funds

Sometimes some people are not aware of their needs if they don't face a crisis. In fact, this emergency fund can help you feel financially secure even if something unexpected happens.

Not only that, your other financial instruments or activities will not be disrupted because emergency funds can meet your needs during a crisis. For example, savings and investments will remain safe and help you achieve better financial planning.

Guide to Collecting Emergency Funds

Everyone's needs are different and diverse. Often our resources are limited to meet infinite needs. Therefore, you need to be careful in collecting emergency funds. You can collect emergency funds weekly or monthly.

Below is a guide in collecting emergency funds:

Conducting Financial Check-up

Financial check-up is the process of checking your current financial condition. This step is quite important because that way you can know how much emergency fund is needed.

Here are some points you can do to know your financial condition:

  • Your current income amount, last year, and expectations in the future.
  • Amount of monthly expenses.
  • Amount of debt or installments owned and how the payment process is. Are installment payments running smoothly or are you having difficulties?
  • Amount of monthly insurance premiums if any
  • Amount of bills that may be constrained.

Through financial check-up, you can also have an idea of how strong and healthy your finances are, so you can make good financial plans and emergency funds.

Preparing Separate Accounts

The most important step before you start collecting emergency funds is opening a special account separate from the account you usually use. This aims so that the fund collection process can be monitored well and prevent the use of emergency funds to fulfill your desires.

In maximizing emergency fund storage, you can also choose credible banks and do not charge large administrative fees (Irfan Bayu, 2022).

Collecting Funds Gradually and Consistently

The next step after knowing how much the ideal emergency fund is, plan its collection gradually. You don't need to rush in collecting emergency funds considering the nominal amount is not small. As long as you save consistently, the target ideal emergency fund will also be achieved according to your wishes.

Setting Time Targets

You can set time targets to be more motivated in collecting emergency funds. The time period can vary according to your needs. For example, within 1 year emergency funds must be collected or even 2 years. Considering emergency funds are quite important, you need to prioritize them so they can be fulfilled quickly.

Don't Delay

Many people delay in collecting emergency funds. This is because the benefits of saving emergency funds cannot be felt immediately, sometimes even requiring quite a long time.

You must not delay collecting emergency funds because the longer you delay, the greater the monthly money that must be set aside later.

Reducing Monthly Expenses

This way is effective for you in saving emergency funds, namely by reducing unnecessary expenses or those that are not too urgent.

You can do this when shopping for daily needs. You can use alternative products that are more affordable with the same function. For example, when buying detergent products. You can use detergent products with cheaper prices because both have the same function in washing clothes.

By reducing monthly expenses, you can set aside more funds to be saved as ideal emergency funds. This is also good because it can form wise shopping habits in yourself.

Places to Save Emergency Funds

You can save emergency funds in various financial instruments. However, there are several products that are more profitable for you to use to save emergency funds, such as:

Bank Savings

Being the most common and popular financial instrument used by many people, you can save at the bank. This is because bank savings are more liquid. Liquid here means easy for you to convert into cash in a short period of time.

Money Market Mutual Funds

The second option for storing emergency funds is money market mutual funds. You don't need to worry because money market mutual funds are different from stocks, so they are not too risky and fluctuating.

Gold Bars

Gold bars are also often used as a place to store emergency funds. This is because gold bars are liquid and easy to sell. Usually gold bar prices also tend to fluctuate following market prices. Plus, gold prices generally increase although requiring a long period of time.

With BTN Realize Ideal Emergency Funds

That's the explanation regarding emergency funds to guides in collecting ideal emergency funds. Collecting emergency funds until reaching the ideal amount is indeed not easy. You need to be careful in choosing the means of storing these funds and be consistent in saving.

After knowing the importance of emergency funds, you certainly want to realize it immediately. Let's realize ideal emergency funds with BTN. BTN provides various savings products that you can adjust to your needs.

Various products that we offer are certainly ready to meet your various needs. There are even several advantages in BTN products, such as free premium life insurance protection, free additional insurance protection in the form of accident grief compensation and auto-debit system from the main account that can make it easier to get transaction details through e-statements sent to email every month without requiring a passbook.

BTN also prioritizes the welfare and security of every customer when transacting. So you don't need to worry if you want to save at BTN. Together with BTN, you can realize safer and long-term financial planning.

Want to immediately feel the various benefits of BTN products? Immediately realize all your plans and dreams with us. You can visit the following website to get more information.


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