By: Laura M. Torres González, Esq.
Financial Planner / Assistant Vice President
Wealth Management Division, BPPR
Saving is a fundamental part of financial planning. However, preparing for emergencies requires saving in a different way. The creation of an emergency fund seeks to avoid using assets destined for retirement and other purposes.
An emergency fund is a liquid quantity separate from the assets used for daily transactions. It is recommended that this type of fund be set up to cover for at least three to six months of expenses, but not more than two years. Savings that exceed your expenses of two years should be dedicated to other purposes, aligned with your financial objectives.
Factors to consider when establishing an emergency fund:
1. Monthly expenses: Necessary expenses such as mortgage, food and utilities must be contemplated.
2. Job security: The certainty of the income to be received determines whether an emergency fund should be greater. For example, income certainty varies if a job’s compensation comes from commissions and other variable income sources or if it comes from a regular salary.
3. Household income: The number of people generating income in the household and the number of dependents are key factors. In each case, it must be considered if the dependents are minors or elderly persons, as they generally have different needs. Another important factor is whether the income is passive (rents, interests) or active (product of work). If your case is the latter, the fund should be greater because active income could decrease due to unexpected disability, illness or unemployment.
4. Possible emergencies: Extraordinary, but probable expenses must be contemplated. For example, if one of the household members suffers from a serious health condition.
5. Other assets: If other liquid assets are available, such as investment accounts, the amount destined to the emergency fund can be lower.
6. Peace of mind: The element of peace of mind is a subjective one that influences the amount of money that an individual might want to maintain in an emergency fund to feel comfortable.
As a protective measure, if a household consists of a couple, it is recommended that both hold half of the emergency fund on separate individual bank accounts. This way, the death of one of the account holders would not impede access to the fund by the surviving spouse. In Puerto Rico, the law allows the heirs to withdraw $15,000 or 25% of the account’s funds, whichever is highest, from the accounts of the deceased, before obtaining the Puerto Rico Treasury Department certification. The distribution of an account’s assets will be completed with the division of the deceased’s inheritance. This process may take months, which is why individual accounts are recommended.
In conclusion: How much should we save for emergencies? The answer depends on many factors, including the ones mentioned above, and considering your personal circumstances and financial objectives.
Popular One’s financial planners1 can provide you with advice in the creation of your own emergency fund.
1 Financial planning may have a cost that could vary based on the plan. Banco Popular de Puerto Rico, its subsidiaries and/or affiliates do not engage in the offering of tax, legal, or accounting advice. If legal, tax, or accounting assistance is required, you may consult a specialized professional in these areas.