As its name suggests, emergency reserve is a separate amount of money that you use only for unexpected cases. It is formed from an initial financial effort, with application in some investment of your trust, and that yields until the time of need.
But how to set up an emergency reserve? How much money do I need to be able to go through periods of turbulence without problems? What are the best investments to provide resources for this purpose? It is for these and other questions that this article was made. By the end of it, you will be aware of the steps that need to be taken to build a solid emergency fund.
First point: change the culture about your money
To start the process of building an emergency reserve, you need to change the way you look at the money you earn.
In Pak, the number of investors is growing, people who understand that leaving money under the mattress or in savings makes you lose more than you make money from these resources.
The investment culture needs to be present in your daily life and that of your family. And you don’t have to keep in mind those stock market investors we see in the movies. Currently, brokers and banks have facilitated access, language and investment models. Surely there is a method that fits your profile and your finances.
From this key turn, you will understand the importance of, month by month, setting aside part of your budget for investment. At first, you can even tighten an account there, another there, but in the medium and long term, this step is vital for you to have a considerable emergency reserve – and, who knows, to be able to even use more money for new investments.
Second point: readjust your budget
Here is another very important step towards building your emergency reserve: you need to set aside money at the end of the month for this purpose.
We tend to think in the short term, imagining that no setback will happen, and we spend our entire salary, with little margin for application in an investment model. Know, dear reader, this thought is wrong.
You can always review your budget spending. Evidently, we live in times of pressure on inflation, with rates reaching double digits, high food prices, electricity and water bills, and other routine expenses. But is there any expense that you could review or replace? I think so.
For this, a valuable tip is to put all monthly expenses in an Excel spreadsheet. By doing this, you will have your home finance numbers in front of you and you will be able to identify which areas you can attack.
Do I really need three streaming subscriptions? Couldn’t transport application expenses be reduced? As well as spending on food for delivery? Understand that this step will be an initial effort to build a benefit in the future. And it has to be a collective understanding of your family because it won’t do any good if you decide to forgo some expenses if your children follow the spending routine. In that case, it’s a kickoff for your children’s financial education.
This is a key point in building an emergency reserve. It is directly linked to your monthly expenses. When thinking about a number, you need to remember that this is, as the name says, an emergency reserve, which will cover your expenses for a certain period until the turbulence dissipates.
But how much does this reserve need to be? Personal finance experts indicate that the ideal is to have funds to cover at least six months of expenses. That is, if you have recurring monthly expenses of R$3,000, you will need at least R$18,000.
Yes, more than linked to your earnings, the reservation is calculated based on your expenses. If you’ve managed to adopt an investor culture, with savings on day-to-day expenses, the larger your budget, the faster you’ll reach your emergency reserve quota and you’ll be able to focus on other investments to make your money go further.
However, this is a rule that can be modified depending on the cases. If your family and you know that expenses tend to increase in a certain period (with school supplies, school re-enrollment, IPVA and IPTU, including other properties), it is healthy to project an increase in this emergency reserve. More conservative personal finance experts believe that a good financial reserve needs to cover expenses for a year. Thus, for a family whose day-to-day expenses are R$3,000, as exemplified in the previous paragraph, the balance would be R$36,000.
I have nothing in the emergency reserve! How do I do?
It’s never too late to start thinking about your financial budget and find spaces in it for investments. Even if you’ve never done it before. It’s always time to kick-start building your emergency reserve.
Initially, you need to keep in mind the importance of emergency reserve. As we said in previous paragraphs, we tend not to project that some difficulty will come our way, and we go about our financial lives without this medium and long-term planning. The same applies if you live with more people.
Everyone has to be aware of the initial efforts to reap the rewards in the future.
After overcoming this barrier, which is more behavioral than action, we set out to practice building the emergency reserve.