Financial Tips: Emergency Fund

Here is the English version of article Dana Darurat

Definition

An emergency fund is a stash of money set aside to cover the financial surprises life throws your way (www.investor.vanguard.com) such as losing job and death. It is sufficient to cover temporary expenses during the severe time. To fulfill its purpose as an emergency fund, the fund should be stored in liquid assets such saving and term deposit. So then the fund can be disbursed immediately as soon as being needed.

Calculation

As functioned to cover temporary expenses, ideal emergency fund needs for each person or family is varied due to a different amount of daily expenses needed. Moreover, family members is another factor in calculating ideal emergency fund needs.

Formula:

Monthly Expense x Factor (3- 12 months)

Here are examples to help differentiate emergency fund need between individual and family:

a) Individual

Budi is a single man who works in a capital city with salary Rp5 million per month. To fulfill his monthly expenses, he spent Rp2.5 million per month. So then, the emergency fund need for Budi is

= Rp2.5 million x 3 months

= Rp7.5 million

(3 being chosen because of his status as a single person)

b) Family

Harto is a head family with salary Rp5 million per month. He spent Rp4 million to feed up his wife and son. So then, the emergency fund need for Harto is

= Rp4 million x 6 months

= Rp24 million

(6 is chosen because of his status as the head family. Besides, Harto bears greater responsibility due to increasing number of family member (3 instead of 1). If the amount is considered too great, Harto may only prepare the emergency fund in a minimum amount for Rp12 million or 3 times monthly expenses coverage).