Building Your Emergency Fund: A Step-by-Step Guide

Emergency funds are savings that are prepared to deal with emergencies in the future. Emergencies can be unexpected events such as illness, accidents, or job loss. Building an emergency fund is an important part of financial management. Not preparing an emergency fund properly can put you at risk of getting into personal debt. This article will discuss the benefits of an emergency fund and A Step-by-Step Guide. 

Benefits of Saving Emergency Fund  

Emergency fund itself has the main purpose of being a fund that fulfils our life needs when things happen that are unwanted or not calculated. Here are some cases where emergency funds will be very helpful so saving emergency funds is something we need to consider: 

• Medical Expenses when Sick: Health is inherently unpredictable, and illness can strike at any time. Even with health insurance, some medical expenses may not be covered. An emergency fund helps us manage these unexpected medical costs, ensuring we get the care we need without financial stress.
• Personal Asset Repair or Replacement Costs: Our personal assets, like cars or houses, can encounter issues at any time. They may be damaged by disasters, stolen, involved in accidents, or simply wear out with age, necessitating repairs or replacements. An emergency fund is essential for covering sudden repairs or replacements, keeping our lives running smoothly. 
• Backup Fund when Losing  Source of Income: For many, a job or business is the primary source of income. However, unexpected events such as layoffs, business failures, or natural disasters can disrupt this income. An emergency fund provides financial security during these challenging times. Financial planners recommend saving at least three months’ salary if single, and six to twelve months’ salary if married, to ensure stability.
• Avoid Debt: Without an emergency fund, people are more likely to borrow money during crises, leading to potential financial burdens. By saving an emergency fund, we can avoid accumulating debt and maintain financial health, even in unexpected situations.

Managing Emergency Fund Wisely 

In managing emergency funds, there are several things that need to be considered:  

• Determine the Amount of Emergency Fund: How much should we keep in our emergency fund? We need to have at least 3 to 6 months of regular expenses as a reserve. If we have family dependents, this amount can be higher. Of course, it would be ideal if this emergency fund is larger because this will make it easier for us to fulfil the needs of ourselves and our family in the process of finding a new source of income. 
• Saving Account: Your emergency fund should be kept in a place that is easily accessible, but not so easy that you are tempted to use it without a good reason. An emergency fund savings account, a deposit that can be withdrawn at any time (Deposit on call), a stock and mutual fund investment app, and even a safe deposit box are all good options. 
• Discipline in Saving: Saving for an emergency fund requires discipline. Set an amount to be set aside each month and stick to it. So when we allocate funds from our main monthly income, we will always separate the emergency fund as the first thing to be set aside from our income before allocating funds for self-gratification, consumptive debt, or even improving the quality of our daily life before time to do so. 
• Liquid and Safe Investments: The emergency fund can be invested to gain profit and maintain its value. However, it should not be invested in high-risk instruments. Instead, choose investments that are liquid, safe, and still offer good returns, such as deposits that can be withdrawn at any time (Deposit on Call), money market mutual funds, sukuk mutual funds, gold, and similar options. It is important to ensure that these investment instruments are sharia-compliant.

When making investment choices, it’s important to select financial instruments that adhere to Sharia principles.

Emergency funds are a crucial resource that can provide financial protection for individuals and their families in the event of unexpected and challenging circumstances. By allocating emergency funds, individuals adhere to Islamic principles that emphasize the importance of prioritizing the well-being and survival of their families, even before charitable donations. It is a reflection of our commitment to ensuring the security and stability of our loved ones. May Allah protects us from unforeseen calamities and enables us to meet the needs of our families. 

Wallahu a’lam 

References

• 4 Manfaat Menabung dan Tips Agar Capai Finacial Freedom. (n.d.). Www.cimbniaga.co.id. Retrieved June 3, 2024, from https://www.cimbniaga.co.id/id/inspirasi/perencanaan/manfaat-menabung-untuk-kumpulkan-dana-darurat 

• 6 Tips Jitu Menabung Dana Darurat yang Kuat – Danasyariah.id | Sharia Peer to Peer Financing. (2024, March 9). https://blog.danasyariah.id/tips-menabung-dana-darurat/ 

• Cara Menghitung Dana Darurat: Langkah-langkah Praktis untuk Persiapan Keuangan di Usia Muda dan Saat Berkeluarga. (n.d.). Www.prudential.co.id. Retrieved June 3, 2024, from https://www.prudential.co.id/id/pulse/article/cara-menghitung-dana-darurat/