We are already talking about why it should constitute an Emergency Fund, where we have identified several reasons for doing so and the purpose of its constitution. We all have the sensitivity and we recognize how important it is to have a certain amount of money saved, but not all of us set goals for that money and whenever we need it we simply use it.
It is not that the concept of saving money for possible needs is not correct, but rather the objective is that it is not defined. The idea is to keep in mind that all ” eggs should be placed in one basket ” because only then will you know how to organize and set your financial goals .
Let’s imagine that you set goals and priorities for your financial life and you want to have a good amount of money in 3 years to make a purchase of a home. Likewise, it has clearly defined that it intends to provide a solid and abundant education to its children.
It has two goals based on family priority and you know you need to fulfill them to feel fulfilled personally and financially.
Should I Join The Two Goals?
Let’s see: Saving for home entry has a 3-year goal, but how long does it take to ensure a solid education of abundant to your children. It is probably significantly longer than 3 years, so it is not advisable to put the two goals together into one.
Let’s get rid of the end result, because what you want to identify is not where to put your money and how to do it, it is not meant to have a savings account or a term deposit for each objective, but rather, defined what is money to enter the house and what is money for their children’s education.
It is true that for short-term purposes you should save your money in accounts with short-term liquidity and for long-term objectives you can always opt for long-term liquidity accounts.
It is also acceptable that term deposits are products that are ideal for short-term purposes and that investments are the ideal products for the long term. However, it is always necessary for the reader to determine in advance your investment profile in order to know if you are dealing correctly with the risk and to check which savings and investment products are right for your objectives regardless of the time frame.
So what about the Emergency Fund?
It is clear and it is accepted that an emergency fund has distinct destinies although all related to immediate and unexpected needs. Unemployment, health care, home repairs, car repairs are accepted reasons for moving an emergency fund.
It is clear then that the emergency fund should be set up to meet short-term needs, so it is a short-term objective that needs immediate liquidity. Therefore, a savings product with the possibility of moving at any time will be ideal for the Emergency Fund, not only because it will allow you to respond as quickly as the event requires it, but also gives you the security you need to solve the event .
Knowing what your financial goals and priorities are is the first step in organizing your financial life, because they will give you the indicators you need to frame your money and organize it by variables.
It is always preferable to organize the financial objectives by term, taking into account the length of time you have to achieve them. However, the amount also clearly influences the savings strategy it needs to create.
In the article Personal Finance in 6 simple Rules through rule 5 where we defend the importance of defining a path for your Personal Finance, we show how the term influences the savings strategy clearly identifying the effort required to achieve it.
Similarly, the relationship between the term and the amount needed to achieve the goal will tell you the monthly effort you need to make and will direct you to simple tasks in Personal Finance, such as:
- The need to create a family budget;
- The need for analysis and interpretation of the main expenditure items;
- End the credit card;
- The need to match your financial effort to the fundamental rules of Personal Finance (spend less than you earn or earn more than you spend);
- Renegotiate credits;
- Reduce the value of charges with your insurance;
- The need to define priorities and savings strategies;
- Among others…
I venture to finish this article saying that the best way to organize and define your financial life is to start with the objectives and priorities and in order to build the ideal Personal Finance model for you.