Learning from the Covid-19 pandemic, it is important for employees to understand how to manage finances ( financial planning ), especially emergency funds ( emergency funds ).
In Indonesia, people are still unfamiliar with the importance of saving emergency funds. According to the Organization for Economic Co-operation and Development (OECD) survey in 2020:
46% of respondents in Indonesia have an emergency fund that is not ideal .
To find out more about emergency funds, what is the ideal amount, how to prepare it, and the role of companies in relation to employee emergency funds , let’s look at the discussion in the following article.
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Get to know the Emergency Fund ( Emergency Fund )
An emergency fund or just-in-case fund is basically money set aside to cover unexpected events in life.
The money aims to increase financial security by creating a safety net that can be used to meet unexpected expenses, such as medical expenses and home repair costs.
Assets in emergency funds tend to be cash or other assets that are liquid (easily disbursed).
This is done to reduce the need to withdraw funds from high-interest debt options, such as credit cards, unsecured loans, or damage your future security by using retirement funds.
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Ideal Amount of Funds for Emergency Needs
The amount or amount of emergency savings funds needed by each individual is different. The range of numbers can be distinguished based on lifestyle or dependents.
Reported from the official website of the Ministry of Finance of the Republic of Indonesia , the ideal amount of an emergency fund is classified based on marital status, with the following details:
- Single: 6 times the monthly expenses
- Married: 9 times the monthly expenses
- Married and have children: 12 times the monthly expenses
From this classification, questions often arise:
Why is the ideal amount for an emergency fund in the range of 6-12 times your monthly expenses?
This is because it will be very risky if the employee’s multiple expenses are less than what has been determined.
In addition, an emergency fund that is too large will also not be effective, because these funds are generally stored in liquid financial instruments.
Therefore, to avoid wastage due to the ease of disbursing funds, excess funds will be more profitable if used for long-term investments.
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5 Ways to Prepare a Precautionary Fund for Employees
Raising an emergency fund is not easy. What’s more, if you have other expenses that must be met. Here are five easy ways to prepare an emergency fund:
1. Create Targets that are Possible to Achieve
Set the initial target with a small amount rather than a large amount. Reaching your first goal can give you motivation to keep going.
Then, set the next target higher than before. At that point, saving will become a habit.
Motivation that starts with a small target will help push you to achieve a bigger target.
2. The Importance of Maintaining Consistency
Setting your initial contribution to a relatively small amount will help you avoid feeling overwhelmed when raising funds just in case.
Not only that, consistency is the most important factor to achieve the ideal savings target.
Also increase your commitment, for example by reducing monthly expenses that are not included in clothing, food and shelter.
3. Use a Special Account
Create a separate account for an emergency savings fund and deposit your chosen contribution amount automatically, either by your employer or the bank.
As well as being more organized, it will prevent you from using up the precautionary fund for day-to-day needs.
4. Reducing Consumptive Habits
The ease of buying goods and the lively promotions advertised on online shopping services can increase one’s impulsivity.
Therefore, it is very important to reduce consumptive spending, namely putting aside non-urgent needs.
Alternatively, you can work around this need by buying a cheaper replacement or making a monthly spending and financial plan to project your needs in the future.
5. Allocate Savings to Sufficient Emergency Funds
The amount allocated for the precautionary fund cannot be too small or too large.
If it is too small, it will be risky and cannot cover an emergency. On the other hand, a large allocation amount will not be effective, because savings accounts generally generate low interest rates.
For that reason, you should limit putting your savings into emergency savings if you’ve reached the target. Start depositing money for investments or anything that generates passive income .
So, that’s how to set up an emergency fund from the start as a preventive measure.
Unfortunately, preventive and anticipatory attitudes in preparing emergency savings are often forgotten by everyone, including employees.
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Many employees make online loans with high interest due to their unpreparedness for emergency savings funds.
As a result, employee performance decreases, too stressed thinking about how to pay off loans and large interest.
Employees also often make employee loans or cash accounts to companies which have an impact on increasing the company’s operational costs.
What if employees need a sudden emergency fund and haven’t had time to set it up?
So, is there a way that companies can play a role in helping employees who need emergency funds quickly?