What is emergency reserve?
No matter how organized your financial planning may be, it is important to be aware that extra expenses always appear at certain times in our lives. A mechanical failure of your car, house maintenance, health problems in the family, in short, several factors that lead you to spend a considerable amount of money when you least expect it.
What is an emergency reserve?
The main characteristic of these expenses is urgency: you need the money fast and there is not much time to delay. Plan ahead To secure yourself in this kind of situation you need to plan by building up an emergency reserve. Otherwise, your only alternative may be to sell an asset or resort to financing.
The question that arises is: how much exactly to set aside for this type of emergency? There is no precise rule, it all depends on your standard of living. In general, what is recommended is to have a fund equivalent to at least three months of current expenses. So, if your current monthly expenses are about $700, the fund should have at least $2,100.
Assuming that the emergency has been caused by job loss, it is necessary to analyze how the labor market is in your area of work, so that you can estimate the time needed to relocate. Since the average time to find a job can exceed six months, it is worth being very conservative when setting up your reserve fund. Thus, setting aside the equivalent of six months of expenses may be ideal, which in the example above equals something like $4,200.