A emergency fund it is a key project to maintain good financial health; however, not all people know how to start it or consider that their financial commitments do not allow them to have these savings, the truth is that regardless of the level of indebtedness it is possible to have this fund.
In Mexico, only 4.3% of the population between 18 and 70 years old has no debts, according to the National Survey of Financial Inclusion 2021 (ENIF) of the National Institute of Statistics and Geography (INEGI). Among financial behaviours, the survey highlights that Barely half of Mexicans separate the money for the payment of debts from the money for their daily expenses and 41.5% keep a record of receipts or outstanding debts to be paid.
The lack of financial education is one of the main causes of the high levels of indebtedness in the country and this goes beyond not knowing how to budget or manage expenses, it is also related to the lack of knowledge of the use of financial instruments, since Although the credits are to solve immediate liquidity problems, many times they end up becoming difficult debts to pay.
Why have an emergency fund?
According to data from the financial advisory platform Rocket.la, 18% of users have debts that require a long-term financial plan to clean up their credit history and in the future aspire to other products and services.
According to the National Commission for the Protection and Defense of Users of Financial Services (Condusef) 39% of people who save formally do so thinking of facing an unforeseen event; 29% allocates it to future personal expenses; 25% for education and 8% to open a business.
Those people who do not have an emergency fund resort mainly to the use of credit cards or another financial product that can sometimes be more difficult to afford, since the product is generally not in accordance with our needs and generates a large debt.
There is no ideal amount for an emergency fund, since this will depend a lot on the financial characteristics of each person; level of income, level of monthly expenses, level of indebtedness, etc. The general suggestion is to have at least 3 months of income in the emergency fund; however, a more suitable amount could be from 6 to 12 months.
Four habits to create an emergency fund
For this reason, I suggest taking into consideration four habits to meet this goal.
1. Set a goal and make consistent contributions
In the goal is the motivation. Your emergency fund may be small if you’re just starting to save. The most important thing is to calculate the time it will take to reach the goal, for this we must ask ourselves how much and how often it is feasible to set aside money.
For contributions to be constant, a specific and viable amount must be set that can be allocated daily, weekly, fortnightly or monthly. Even sometimes during the year we receive some additional income, such as bonuses or profit sharing, if we save at least 30% or a part of this resource and add it to the emergency fund, the time to reach our goal is reduced. But if gathering this percentage is difficult, you can start with 10% and gradually increase it.
2. Separate the money
There are fixed expenses, which are used to pay rent, buy food, transportation, school fees, among other needs. On the other hand, there are variable expenses such as going on a trip, buying new clothes and other supplies that are not urgent.
After defining the category of each expense, a person can define how much money is available to build the emergency fund. A feasible method is to apply the 50-30-20 rule, where 50% of income goes to essential expenses; 30% to secondary expenses and 20% to the savings fund.
3. Save it, but have it accessible
Having an emergency fund in cash can be useful to solve a contingency as soon as possible, but it also implies a risk since it can be lost or stolen.
Ideally, it should be in a safe place, but at the same time accessible. A bank account that offers you a rate of return above CETES or in CETES, even a prepaid card, are good options to make deposits and use them in an accessible way if the situation warrants it.
4. Use it, under certain rules
How do you know if an expense or unforeseen event should be covered by the emergency fund? There is no precise rule, but the resource must be approached with caution and a detailed assessment of the moment of financial difficulty, in addition to trying to replenish the fund once the emergency is over.
An emergency fund can be used under certain rules that we establish. The ideal is to avoid spending it on consumer products and leave it for medical bills, food, housing, etc. In case of using it, it will be important to commit to rebuilding it every time we use it. A good financial culture allows us, over time, to have a more solid fund that is easier to rebuild.
Daniel Rojas Daniel’s experience is as a Financial Regulator. In recent years he has focused on solving online procurement challenges for some of the largest credit issuers in Latam (BBVA, Coppel, Bancolombia, etc). In addition, he has focused on closing business deals with our partners.