Emergency Fund: Tips for improving your financial health
One day, everything seems to be going well. The next day, the car breaks down, the laptop stops working and an unexpected medical expense arises. So, what can you do? When there's no room in the budget, people usually resort to credit. This can trap people in a difficult-to-break cycle.
One of the smartest decisions you can make to protect your financial independence is to create an emergency fund. This article explains what it is, how much you should put aside, and how to get started — even if you're still studying or have just started work. Read on to find out how setting up an emergency fund can help you prepare for life's challenges.
What is an emergency fund?
An emergency fund is a sum of money that is set aside for unexpected situations. It is not intended for use on holidays or to fund upgrades to your mobile phone. Rather, it’s a financial safety net that protects you when life takes an unexpected turn, whether that's due to a medical emergency, loss of income, or an unforeseen expense.
The idea is simple: When something unexpected happens, instead of getting stressed or borrowing money, you use your fund. Then, calmly, you replenish it.
You don’t need to have a fortune. The important thing is to get started. Even if you're still studying or have a low income, there are ways to gradually build up this fund.
Why is it important to have an emergency fund?
It's not just about "doing the right thing”. Having an emergency fund provides freedom, security and, above all, peace of mind. Here’s what you get:
A quick response to unforeseen events
If an unexpected expense arises, there’s no need to waste time and energy looking for a last-minute solution.
Less financial stress
Having a reserve available helps you keep a cool head during difficult times. This can make all the difference!
Less dependence on credit
By setting up a separate fund, you can avoid resorting to credit cards, personal loans or borrowing money (and the interest that comes with them).
More focus on your plans
When your emergencies are covered, you can focus on what really matters: investing in your future and your projects without any distractions or hesitation.
How much money should you have in an emergency fund?
In short, it should cover three to six months worth of your essential expenses. The full answer is that it depends on your circumstances, income and level of stability.
The emergency fund should cover the minimum costs that you would still need to pay if something went wrong, such as losing your job or experiencing a drop in income. We’re talking about the essentials: accommodation, food, utilities, transport, healthcare and communication. The essentials for maintaining a minimally stable life.
For example, if your monthly living expenses average €800, you should aim to build up a fund of between €2,400 and €4,800. We recommend this range because three months’ worth of funds is usually enough time to solve a simple unforeseen problem, whereas six months’ worth of funds gives you more leeway in prolonged situations.
The most important thing to remember is that you don’t need to reach your target amount straight away. Building up an emergency fund takes more than a month. Every euro you invest takes you a step closer to your goal, and it adds up little by little.
The important thing isn’t how much is in the fund, but having a reserve that makes sense to you, provides security and is sustainable.
A practical way to create your emergency fund
Even with a limited budget, you can build up your emergency fund little by little, giving you more control over your life. The following steps are recommended:
1. Make a list of your essential expenses
Before you start putting money aside, you need to work out how much you spend on living costs each month. Exclude outings, impulse purchases and additional expenses. Focus on the essentials, such as rent or accommodation, food, transport, internet/mobile phone services, healthcare and basic utilities.
Tip: Use an expense management app or a basic Excel spreadsheet to keep track of your spending over the course of a month. You’ll be surprised at what you discover.
2. Set yourself a realistic goal
Calculate how much you would need for a three-month emergency fund based on your expenses. But be careful — this is your fund. If you’re a student with few expenses, you could start with a smaller target, like setting aside €500 or €1,000.
Having a concrete goal helps you to stay focused and provides the extra motivation needed to keep going.
3. Open a separate account
Make sure you don’t mix up the emergency fund with your day-to-day account. Ideally, you should have a separate account for your emergency fund, preferably with easy access, but not too easily accessible. This approach helps you avoid making impulsive purchases and gives you a clearer picture of your progress.
Savings accounts or digital accounts with "goal” features can be good options for this.
4. Set up automated transfers
If you receive a fixed income, arrange for a set amount to be transferred to your account each month. The important thing is establishing a habit. Automating this transfer to the fund account helps you to maintain consistency without having to think about it. Start with what you can manage. If money is tight this month, adapt accordingly. But don’t give up.
5. Make adjustments as your life changes
Have you moved house? Have your earnings increased (or decreased)? Review your emergency fund periodically. It should reflect your current financial situation and grow alongside it. You can top it up by adding bonuses, holiday pay or money that has been left over from one month to the next.
6. Only use it when it’s absolutely necessary
Remember: this fund is intended for genuine emergencies only. Try to avoid using it for impulse purchases or "unmissable opportunities”. When it comes to using it (and yes, you will need to do that), the next step is straightforward: top it up as fast as you can.
Once the emergency fund is set up, what should I do next?
Once you have built up your emergency fund, or even while you are in the process of doing so, it is important to ensure that the money does not remain idle. Yes, even if you don't spend your money, it loses value over time due to inflation. The trick lies in knowing how to use it wisely.
Put your money to good use
Once you have established a solid financial foundation, the next step is to allocate any remaining funds towards specific goals or investments. There's no reason to keep all your money in your current account where it won’t earn any interest and will lose value over time. The idea is to make your money grow, rather than letting it stagnate.
Tip: With Carregosa NextGen you can access products designed for the early stages of your financial career. These include fixed deposits, shares, ETFs (PRIIPs) and investment funds. Thanks to the GoBulling Investor Platform and its fully digital, streamlined account opening process, investing has never been easier. You can try the DEMO version here.
Create deliberate savings
Think about what you would like to achieve in the next two, three or five years. A trip? A car? A master’s degree? Saving for a deposit on a house? Set up a new account and arrange for a sum of your choice to be transferred there each month.
It doesn’t have to be much. It just needs to be consistent. You’ll see real results over time.
Develop a long-term vision
Instead of saving for 'one day', start planning your goals using a calendar. Giving each goal a name and a deadline changes the way you manage your money. It helps you to prioritise, avoid making impulsive decisions, and focus on what matters most to you.
FAQs
Below are the answers to the most frequently asked questions about emergency funds.
I have debts. Should I prioritise paying them off or building an emergency fund?
Ideally, you should do both at the same time. Having a small fund can prevent you from getting into debt in the event of an emergency. This will allow you to focus on paying off your debts more effectively.
Where is the best place to keep my emergency fund?
A good option is a savings account with some liquidity or a sub-account with "objectives”. Don’t invest this money in risky products. The purpose of the emergency fund is to be accessible, not to grow.
Can I use the fund to take advantage of an investment opportunity?
No, the purpose of the emergency fund is to protect you, not to increase your assets. If you want to invest, that’s great! But make sure you create a separate savings account for that purpose.
What is the "usual” amount of time it takes to build up a fund?
It depends on your financial situation and your goals. It may take several months, or even more than a year, but that’s fine. The key is to stick with it and tweak the amount as necessary.
Are you ready to take your first step?
One of the simplest and most powerful steps you can take to gain financial independence is to create an emergency fund. You’ll be better prepared for whatever life throws at you. The sooner you start, the better.
We’re here to help if you need assistance with organising your finances, setting goals, or starting to invest with confidence. We can support you in creating a personalised strategy and provide tools to help you automate your savings and investments, which will be tailored to your profile and timeframe.
Contact us to get started. Go at your own pace, safe in the knowledge that you’re creating something unique.