Find out how to prepare for unforeseen circumstances and where to invest your emergency reserve so that your money can be used in times of crisis.
Do you have the feeling that your salary gets smaller over time? Does it seem like no matter what we do, the money just isn’t enough?
With inflation, the cost of living increases and financial emergencies can happen. Like when someone gets sick, their car breaks down, or periods of unemployment.
These are things you can’t predict and, at these times, the budget is tight. Many people resort to borrowing, either at the bank or with family members. When this happens, it is normal to create debt and stop investments .
But there is a way to save money and handle emergencies without breaking the bank. This is possible through the emergency reserve ! Find out where to invest your emergency reserve in today’s article!
Emergency reserve: what is it?
As the name suggests, the emergency reserve is an amount of money that someone keeps in order to solve unexpected situations . Usually, this money is invested in an application with high liquidity, that is, the amount can be withdrawn quickly.
Normally, the value of a reservation is approximately 6 months of your monthly expenses . Quite a lot, right? The important thing is to start and go little by little, saving an amount every month.
Check out some examples of emergency situations now:
- the car broke down halfway and needs repair;
- someone in the family has become ill and needs medication;
- you have been terminated from your current job;
- the house was hit by rain and needs repairs.
As we can see, financial unforeseen events happen to anyone. But when someone has their emergency reserve, it will be easier to go through the struggle without compromising the family income .
What is not a financial emergency?
All expenses that we manage to do without are considered superfluous . Expenses that have nothing to do with our well-being and health. Some examples are:
- buy a new cell phone, shoes and clothes;
- eat out every day;
- take advantage of a store promotion;
- go out with friends every weekend.
Not that these expenses are prohibited, but as long as the emergency reserve is being made, the rest can be fit within the budget. It’s all about financial planning .
Why do you need an emergency fund?
The emergency reserve works as a steppe for your financial life . An unforeseen happened? Redeem a portion of the reserve to cover the problem.
After putting out the fire, you must replenish the amount withdrawn from the reserve as soon as possible. With that money, you have more financial security and, if any problems arise, you are much more relaxed.
What is the ideal value of the emergency reserve?
To calculate the value and know where to invest your emergency reserve, you must consider your current cost of living . And to find out that amount, you need to add your fixed and variable expenses.
Attention: the cost of living is not the amount of your monthly salary, but all the expenses you pay monthly. This amount includes fixed expenses and variable expenses.
Fixed expenses are all the amounts you have to pay every month and have a fixed amount — your rent and your children’s school fees, for example. Expenses that change monthly are variable expenses , which include the electricity bill and supermarket purchases, for example.
Below are some examples of these costs:
|fixed expenses||Variable expenses|
|internet plan||Water and electricity bills|
|Financing (home, car or motorcycle)||Transport|
|Insurance, health plans||Shopping for clothes and accessories|
After defining the expenses , it’s time to add it all up to find out how much you need to save as an emergency reserve and what is the best way to invest that amount — here, we advance: leaving that money in your checking account is not a good choice.
Ideally, as advocated by some specialists, the reserve should be approximately six months of the current cost of living . In this sense, if the cost is 5,000, the reserve should be around 30,000. This recommendation is based on the principle that, if you find yourself suddenly without income, you would have a few months to get back on your feet financially, without having to change your standard of living.
Does six months of living expenses sound like a lot to you? In fact, this is a considerable amount, but you can start little by little and build up this reserve over time, aiming at a more balanced and healthy financial life .
How to create an emergency reserve?
Before thinking about where to invest your emergency reserve, it is essential to know what you need to do to accumulate this amount . The first step is to understand that the reserve will not be set up overnight, but that the only way to save the necessary amount as quickly as possible is to start today. Check out our tips to help you on this mission!
Organize your income and expenses
As we said, the emergency reserve should be a priority in the face of unnecessary expenses. And the only way to know which expenses are really necessary is to have control over all of them. Therefore, keeping income and expenses organized is essential for those who want to create a financial reserve.
Financial spreadsheets are usually the easiest way to keep this information under control, but whatever the methodology adopted, the most important thing is that you have recorded everything that comes in and goes out of money in the month. Remember to break up the data as much as possible — instead of posting R$3,000 in a credit card bill, for example, break down the expenses made on the card and understand, in detail, where your money is going.
pay your debts
The number one priority for anyone in debt is finding ways to pay off debt . Debts are subject to interest and a small debt can snowball and become difficult to deal with.
Therefore, if you are in a debt situation, try to negotiate with creditors and get rid of debts as soon as possible, before you even start thinking about saving money for your emergency reserve. Believe me: the best way to save is not to owe!
Avoid unnecessary expenses
Expenses that can be cut from your budget without impacting your life are, in general, the great villain of your emergency reserve. Often, we don’t save a certain amount per month, because that amount is never left over. But, the question is: is there not enough because your basic expenses are high or not enough because you spent what you shouldn’t?
Remember that avoiding unnecessary expenses is not synonymous with never being able to spend on superfluous things or leisure, for example. These expenses will never be a problem, as long as they happen after the amount of your reservation has already been saved and do not compromise your budget for the month .
Putting together an emergency fund is not something that happens overnight. For that, in fact, you need to plan . Therefore, it is essential to set goals and outline paths that will help you achieve them.
If you know you need to save x amount per month, for example, for your emergency reserve, but you have difficulty saving that amount now, set gradual goals , which increase over the months.
Another important point regarding goals is that they help us maintain discipline . Who doesn’t like to feel victorious in the face of some proposed goal, right? So, set your individual goals and make them your fuel so you don’t get discouraged before you get where you want.
How to avoid financial unforeseen events?
As the name implies, you cannot predict unforeseen events. And if you can’t predict it, you can’t avoid it, right? In fact, more or less! Even if you cannot avoid unexpected situations, you can prepare for them and thus significantly reduce their impact on your life.
Setting up an emergency fund is one way to prepare, but actually, some steps come before that. The first is to act supported by the concepts of financial education , taking into account the need to have conscious expenses and the maxim that money was made to help you achieve your goals and not to become a constant headache for you.
Financial planning is also fundamental to this process, after all, when it comes to your financial life, you can’t act like there’s no tomorrow. Setting short, medium and long-term goals and outlining the paths to achieve them is essential so that financial unforeseen events, even though they cannot be avoided, impact you as little as possible.