There’s no doubt that we are living in uncertain times, especially when it comes to our personal finances.
With Spain’s rate of inflation currently sitting at around 10%, which is a 37-year high, the cost of living is naturally at the forefront of all of our minds.
Nobody knows how recent world events are going to unfold and what impact they will have on the cost of living here in Spain. However, one thing that is for sure is that we should all have sufficient funds to fall back on during difficult economic times.
There are many events in life that can lead us to have to fall back on contingency funds. These can include household appliances breaking down, our cars packing up, becoming ill and unable to work or getting a divorce.
All of these and more can have a negative impact on our incomes.
The fact is that if you don’t have adequate financial backup when you most need it, you can end up having to resort to more expensive sources of funding to get you out of a sticky situation.
Many people will end up reaching for their credit cards or taking out a loan. This is never advised as interest on borrowing will only lead to an increase in your fixed monthly expenses.
Then there is the other option of selling off your long-term investments, such as stocks and shares or mutual funds.
All of these will just serve to sabotage any medium to long-term financial goals you may have.
How much should I set aside for emergencies?
With this in mind, the Bank of Spain recently published their own advice on the subject, specifically, how much money we should have set aside for any unforeseen circumstances.
How much you need will obviously depend on your personal circumstances and how many people you need to take care of.
The Bank of Spain recommends that we should all have between three and six months of expenses put aside.
Where should I keep my emergency funds?
The first rule for any emergency fund is that it is easily accessible and therefore, easy to get our hands on when we need it urgently.
The second rule is to make sure that you are placing it in a risk-free financial product so that your capital is not at risk. That way you always know the very minimum you will have available for those ‘rainy days’.
Although the preservation of your original capital is the most important consideration when building your emergency fund, you still want your money to work for you wherever possible.
In this respect, the Bank of Spain recommends investing it in an account or risk-free investment that will continue to give you a return. Even if this is only small, it all adds up and will help your emergency balance to grow when not needed.
They also recommend checking whether a minimum balance is required and if there are any commissions or fees involved that may eat away at any potential profits.
So remember. If you are going to accumulate an emergency fund, this needs to be between three and six months of expenses. It needs to be easily accessible, preserve your capital and where possible, provide you with interest or a return to help it grow.
Updated: July 14, 2022 CET